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Harvard Business Review

Executive Summaries

Cover Feature

The Secrets to Successful Strategy Execution

Gary L. Neilson, Karla L. Martin, and Elizabeth Powers Reprint: R0806C

When a company finds itself unable to execute strategy, all too often the first reaction is to redraw the organization chart or tinker with incentives. Far more effective would be to clarify decision rights and improve the flow of information both up the line of command and across the organization. Then, the right structures and motivators tend to fall into place.

That conclusion is borne out by the authors' decades of experience as Booz & Company consultants and by the survey data that they have been collecting for almost five years from more than 125,000 employees of some 1,000 organizations in more than 50 countries. From this data they have distilled--and ranked in order of importance--the top 17 traits exhibited by the organizations that are most effective at executing strategy.

The single most common attribute of such companies is that their employees are clear about which decisions and actions they are responsible for. As a result, decisions are rarely second-guessed, and accurate competitive information quickly finds its way up the hierarchy and across organizational boundaries. Managers communicate the key drivers of success, so frontline employees have the information they need to understand the impact of their day-to-day actions.

Motivators--like performance appraisals that distinguish high, adequate, and low performers and rewards for fulfilling particular commitments--are also important but are most effective when applied after decision rights and information flows have been addressed. That holds true for structural moves as well. Surprisingly, the most effective structural moves turn out to be promoting people laterally--and more slowly.

How can you make the most educated and cost-efficient decisions about which change initiatives to implement? The authors have developed a powerful online diagnostic and simulation tool that can help you test the effectiveness of various approaches virtually, without risking significant amounts of time and money. Forethought

Stopping the Exodus of Women in Science

Sylvia Ann Hewlett, Carolyn Buck Luce, and Lisa J. Servon Reprint: F0806A

A new study reveals that U.S. companies face a troubling brain drain: Fifty-two percent of female scientists, engineers, and technologists abandon their chosen professions. If companies understand why women drop out, however, they can create targeted interventions and head off a talent shortage.

Getting Sound Advice on Social Initiatives

Steven Grover Reprint: F0806B

Burger King has found a low-key but surprisingly effective way to deal with consumer concerns about animal welfare: Establish an advisory panel of outside experts who can help analyze and filter ideas for initiatives.

Subsidies and the China Price

Usha C.V. Haley and George T. Haley Reprint: F0806C

New research suggests that Chinese companies' price advantage comes not from low-cost labor but from massive government subsidies. That finding has major implications for foreign firms that compete with, or source from, those companies.

Next-Generation Online Cons

Clay Shirky Reprint: F0806D

Online business scams are rising because the internet offers a perfect medium for con artists, who know that the money's in business. Companies can meet that threat with three defensive strategies.

A Conversation with Bob Iannucci Reprint: F0806E

Nokia's chief technology officer is helping the company find growth by going in a radical new direction. Because Nokia has been down the reinvention road before, Iannucci believes it has the mind-set, structure, and strategy in place to realize its "deep future."

Tapping Hidden Opportunities in China's New Tax Law

Jeff Olin and Gary James Reprint: F0806F

China's new tax regulations provide attractive incentives for foreign companies that are willing to help the government improve local infrastructure, make Chinese businesses greener, and shift the country's industry from manufacturing cheap products to providing high-quality goods.

The Fatal Flaw in Pay for Performance

Ben W. Heineman, Jr. Reprint: F0806G

Boards should tie CEO pay to more than just company performance--they should link it to performance with integrity. Otherwise, companies can't build the reputation that is vital for survival.

The Best Advice I Ever Got

Stephen A. Schwarzman Reprint: F0806H

The chairman and CEO of the Blackstone Group reflects on the advice of his high school track coach, who continually reminded him that the person who is most prepared is the one who wins.

One Reason Women Don't Make It to the C-Suite

Louann Brizendine, MD Reprint: F0806J

There's a certain age, long established by large corporations, at which executives must make their play for the big promotion that will put them in line for the C-suite. While the timing is good for men, it's not good for women.

Reviews

Featuring Megacommunities: How Leaders of Government, Business and Non-Profits Can Tackle Today's Global Challenges Together, by Mark Gerencser, Reginald Van Lee, Fernando Napolitano, and Christopher Kelly. HBR Case Study

Why Are We Losing All Our Good People?

Edward E. Lawler III Reprint: R0806A

Is it a sign or just a coincidence that several talented employees have recently left Sambian Partners? The architecture and engineering firm's latest defector refuses to tell the head of human resources, Mary Donillo, why he was unhappy. And the self-administered employee surveys don't reveal much. When CEO Helen Gasbarian gets word of the next possible flight risk, she promotes the employee on the spot. How can Sambian stop the talent drain? Four experts comment on this fictional case study.

Anna Pringle, the head of international people and organization capability for Microsoft, thinks that Helen should take a hard look at Mary, who is not safeguarding the firm's talent. Helen must also become an attentive listener.

F. Leigh Branham, the CEO of human resources consultancy Keeping the People, thinks that Sambian's employees need a forum in which they can speak openly about their discontent. The candid discussions can expose the "triggering events" that impel people to leave, such as a disconnect between the firm's long-standing focus on innovative design and a more recent concern with profitability.

Jim Cornelius, the chairman and CEO of Bristol-Myers Squibb, once faced a potential employee exodus as interim CEO of the pharmaceutical company. He advises Helen to meet face-to-face with her most talented employees and assure them that she understands their concerns and desires.

Jean Martin, the executive director of the Corporate Executive Board's leadership council, urges Helen to support a mission and culture to which employees will feel connected. She explains that although people join companies for rational motives, they stay for emotional ones. By the time unhappy workers tell their managers what's going on, it's often too late. Features

Business Basics at the Base of the Pyramid

Vikram Akula Reprint: R0806B

A decade after founding SKS Microfinance, CEO Akula explains how to make money at the bottom tier of the economic pyramid while raising the living standards of the people who occupy it. His company, which provides many small-business loans and other financial services to poor women in India, has a customer base that has been nearly tripling each year and now numbers more than 2 million.

Akula attributes his firm's success in part to heeding three principles: Adopt a profit-oriented approach in order to access commercial capital; boost capacity by standardizing products, training, and other processes; and use the latest technology to reduce costs and limit errors. Collectively, these for-profit maxims reflect a rethinking of the conventional microfinance model, which simply aims to break even. Instead, SKS scales up to achieve growth; the margins are razor thin, but the volume is staggering--160,000 new customers every month. Numbers like that give the company great leverage with partners--insurers, telecom providers, consumer goods manufacturers, and so on--whose products SKS's clients need.

Customers are indeed central to Akula's enterprise. Every SKS loan officer is required to do what's best for the client, even if it undermines the firm's short-term interests. That means everything from traveling far and wide to meet with prospective borrowers on their schedules to scratching out repayment plans in the dirt with them. Such commitment scales up customer loyalty, which ultimately improves the fortunes of not only the clients themselves but also the company and its investors.

The Next Revolution in Productivity

Ric Merrifield, Jack Calhoun, and Dennis Stevens Reprint: R0806D

If your company embraced the reengineering revolution and is now hitting a wall, look beyond business processes to the new frontier of efficiency: the activities that make up those processes. Advances in IT--especially a relatively recent one called service-oriented architecture--are making it possible to design and deploy business activities as Lego-like software components, which can help transform your business into a highly productive plug-and-play operation. SOA enables discrete activities to be accessed via the internet and to be easily updated, shared, bought, and sold--both within your organization and externally.

Most companies have thought of SOA merely as an easier, less expensive way to maintain the software that supports existing operations. By failing to revisit their organizational designs before applying SOA, however, these businesses are missing an opportunity to replace proprietary processes and activities with standardized, fungible ones.

That's the nuanced argument made by Merrifield, of Microsoft; Calhoun, of Accelare; and Stevens, of Synaptus. To guide you through the intricacies of revisiting your operations, they outline an approach called a business capabilities analysis. Their method involves diagramming your company's work activities, describing the capabilities that support them, valuing and assessing the performance of both, and creating a heat map that helps identify the priorities for an improvement program.

The authors share real-world examples of companies that have reaped rewards from this self-analysis and subsequent SOA implementation. They also acknowledge the barriers to applying SOA, including the gulf between CEOs and their IT departments. The leaders who overcome such obstacles, say the authors, will pioneer the next great leap in corporate productivity.

Design Thinking

Tim Brown Reprint: R0806E

In the past, design has most often occurred fairly far downstream in the development process and has focused on making new products aesthetically attractive or enhancing brand perception through smart, evocative advertising. Today, as innovation's terrain expands to encompass human-centered processes and services as well as products, companies are asking designers to create ideas rather than to simply dress them up.

Brown, the CEO and president of the innovation and design firm IDEO, is a leading proponent of design thinking--a method of meeting people's needs and desires in a technologically feasible and strategically viable way. In this article he offers several intriguing examples of the discipline at work. One involves a collaboration between frontline employees from health care provider Kaiser Permanente and Brown's firm to reengineer nursing-staff shift changes at four Kaiser hospitals. Close observation of actual shift changes, combined with brainstorming and rapid prototyping, produced new procedures and software that radically streamlined information exchange between shifts. The result was more time for nursing, better-informed patient care, and a happier nursing staff.

Another involves the Japanese bicycle components manufacturer Shimano, which worked with IDEO to learn why 90% of American adults don't ride bikes. The interdisciplinary project team discovered that intimidating retail experiences, the complexity and cost of sophisticated bikes, and the danger of cycling on heavily trafficked roads had overshadowed people's happy memories of childhood biking. So the team created a brand concept--"Coasting"--to describe a whole new category of biking and developed new in-store retailing strategies, a public relations campaign to identify safe places to cycle, and a reference design to inspire designers at the companies that went on to manufacture Coasting bikes.

The Contradictions That Drive Toyota's Success

Hirotaka Takeuchi, Emi Osono, and Norihiko Shimizu Reprint: R0806F

Toyota has become one of the world's greatest companies only because it developed the Toyota Production System, right? Wrong, say Takeuchi, Osono, and Shimizu of Hitotsubashi University in Tokyo. Another factor, overlooked until now, is just as important to the company's success: Toyota's culture of contradictions.

TPS is a "hard" innovation that allows the company to continuously improve the way it manufactures vehicles. Toyota has also mastered a "soft" innovation that relates to human resource practices and corporate culture. The company succeeds, say the authors, because it deliberately fosters contradictory viewpoints within the organization and challenges employees to find solutions by transcending differences rather than resorting to compromises. This culture generates innovative ideas that Toyota implements to pull ahead of competitors, both incrementally and radically.

The authors' research reveals six forces that cause contradictions inside Toyota. Three forces of expansion lead the company to change and improve: impossible goals, local customization, and experimentation. Not surprisingly, these forces make the organization more diverse, complicate decision making, and threaten Toyota's control systems. To prevent the winds of change from blowing down the organization, the company also harnesses three forces of integration: the founders' values, "up-and-in" people management, and open communication. These forces stabilize the company, help employees make sense of the environment in which they operate, and perpetuate Toyota's values and culture.

Emulating Toyota isn't about copying any one practice; it's about creating a culture. And because the company's culture of contradictions is centered on humans, who are imperfect, there will always be room for improvement.

The Multiunit Enterprise

David A. Garvin and Lynne C. Levesque Reprint: R0806G

A multiunit enterprise is a geographically dispersed organization built from standard units (stores, restaurants, or branches) that are aggregated into larger geographic groupings (districts, regions, and divisions). Although this organizational structure has become the norm in several industries, it has received little attention from academics and consultants. Garvin and Levesque set out to fill that gap in management thinking with their research.

The authors closely studied the office supply company Staples for two years and then collected data from 12 other multiunit enterprises. In this article, they discuss the unique problems that such corporations face, describe how managers tackle those challenges, and offer lessons that will help all types of organizations execute strategy.

In a multiunit enterprise, four tiers of management constitute the field organization: store, district, regional, and divisional heads. All these managers are responsible for meeting targets set by corporate headquarters and implementing strategy. To do so, they adhere to five principles of organizational design. First, the field organization's different tiers have overlapping responsibilities; together they create a multilayered net to catch any problems that arise. Second, managers at all levels serve as integrators, coordinating diverse activities and optimizing the efforts of the whole organization rather than its parts. Third, higher-level managers filter data from headquarters to frontline managers, who otherwise might feel overwhelmed by a constant stream of initiatives. Fourth, regional and divisional heads in particular act as translators, defining in concrete terms how the field organization can roll out initiatives. Finally, all managers share responsibility for talent development.

How the Best of the Best Get Better and Better

Graham Jones Reprint: R0806H

What is the real key to elite performance? According to sports psychologist turned executive coach Graham Jones, star athletes and businesspeople share one defining trait: mental toughness. People who become champions aren't necessarily more gifted than others; they're just masters at managing pressure, meticulously tackling goals, and driving themselves to stay ahead of the competition.

Jones, who has advised Olympic medalists and Fortune 500 executives, sees many parallels between the arenas of business and sports, especially in the behavior of people who rise to the very top. These stars have learned to love pressure because it spurs them to achieve. Inner-focused and self-directed, they concentrate on their own excellence and forget the rest. They don't get distracted by others' victories or failures--or even by a personal tragedy off the field of competition. Like Darren Clarke, the golfer who inspired his team to a Ryder Cup victory shortly after the death of his beloved wife, elite performers are masters of compartmentalization.

Superstars rebound from defeats more easily, Jones observes, because they don't engage in self-flagellation. One of the keys to their success is a relentless focus on the long term and the careful planning of short-term goals that will help them attain major milestones. Competition doesn't daunt elite performers; they just use it to challenge themselves--and they never stop striving. Even after becoming benchmarks in their fields, stars keep their edge by reinventing themselves.

Star businesspeople and athletes also recognize the importance of celebrating their wins. It's not just the emotional reward that's important, however: The very best performers also analyze the factors underpinning their success. That helps them build their expertise and their confidence.

Patent Sharks

Joachim Henkel and Markus Reitzig Reprint: R0806J

R&D companies are increasingly falling prey to patent sharks: firms with hidden intellectual property that surface, threatening to sue, when their rights are inadvertently infringed. The attacks usually come out of the blue, and companies' traditional lines of defense, designed for fighting off visible competitors, are essentially useless in this type of guerrilla warfare. Munich University of Technology's Henkel and London Business School's Reitzig offer five principles to help companies avoid attack.

Move away from amassing huge patent portfolios for cross-licensing with competitors. Creating technological interdependence can work among competitors interested in exchanging technology. Patent sharks, however, want only monetary gains.

Simplify standards and create more-modular designs. Companies become vulnerable when a shark's technology is built into a standard and they can neither stop using the technology nor switch to a feasible alternative. The solution is to simplify standards to minimize the number of irreplaceable core components and to create more-modular designs, so an infringing module can be swapped out for a legitimate one.

Cooperate with competitors early in the R&D process. Disclosing unprotected ideas to competitors can seem counterintuitive, but sharing information early on may help companies avoid developing products that are susceptible to attacks.

Foster interdepartmental and intercompany cooperation. Assigning patent lawyers to projects from the start reduces the costs of protecting high-quality technologies down the line.

Stop flooding patent offices with insignificant inventions. The deluge has actually made it easier for sharks to secure protection for trivial innovations, thus increasing the chances that a company will unknowingly infringe on a patent.

The Secrets to Successful Strategy Execution

Research shows that enterprises fail at execution because they go straight to structural reorganization and neglect the most powerful drivers of effectiveness--decision rights and information flow.

by Gary L. Neilson, Karla L. Martin, and Elizabeth Powers

cD- INTERACTIVE TOOL: Use this simulator to test the effectiveness of various change initiatives.

A brilliant strategy, blockbuster product, or breakthrough technology can put you on the competitive map, but only solid execution can keep you there. You have to be able to deliver on your intent. Unfortunately, the majority of companies aren't very good at it, by their own admission. Over the past five years, we have invited many thousands of employees (about 25% of whom came from executive ranks) to complete an online assessment of their organizations' capabilities, a process that's generated a database of 125,000 profiles representing more than 1,000 companies, government agencies, and not-for-profits in over 50 countries. Employees at three out of every five companies rated their organization weak at execution--that is, when asked if they agreed with the statement "Important strategic and operational decisions are quickly translated into action," the majority answered no.

Execution is the result of thousands of decisions made every day by employees acting according to the information they have and their own self-interest. In our work helping more than 250 companies learn to execute more effectively, we've identified four fundamental building blocks executives can use to influence those actions--clarifying decision rights, designing information flows, aligning motivators, and making changes to structure. (For simplicity's sake we refer to them as decision rights, information, motivators, and structure.)

In efforts to improve performance, most organizations go right to structural measures because moving lines around the org chart seems the most obvious solution and the changes are visible and concrete. Such steps generally reap some short-term efficiencies quickly, but in so doing address only the symptoms of dysfunction, not its root causes. Several years later, companies usually end up in the same place they started. Structural change can and should be part of the path to improved execution, but it's best to think of it as the capstone, not the cornerstone, of any organizational transformation. In fact, our research shows that actions having to do with decision rights and information are far more important--about twice as effective--as improvements made to the other two building blocks. (See the exhibit "What Matters Most to Strategy Execution.")

Sidebar Icon What Matters Most to Strategy Execution (Located at the end of this article)

Take, for example, the case of a global consumer packaged-goods company that lurched down the reorganization path in the early 1990s. (We have altered identifying details in this and other cases that follow.) Disappointed with company performance, senior management did what most companies were doing at that time: They restructured. They eliminated some layers of management and broadened spans of control. Management-staffing costs quickly fell by 18%. Eight years later, however, it was déjà vu. The layers had crept back in, and spans of control had once again narrowed. In addressing only structure, management had attacked the visible symptoms of poor performance but not the underlying cause--how people made decisions and how they were held accountable.

This time, management looked beyond lines and boxes to the mechanics of how work got done. Instead of searching for ways to strip out costs, they focused on improving execution--and in the process discovered the true reasons for the performance shortfall. Managers didn't have a clear sense of their respective roles and responsibilities. They did not intuitively understand which decisions were theirs to make. Moreover, the link between performance and rewards was weak. This was a company long on micromanaging and second-guessing, and short on accountability. Middle managers spent 40% of their time justifying and reporting upward or questioning the tactical decisions of their direct reports.

Armed with this understanding, the company designed a new management model that established who was accountable for what and made the connection between performance and reward. For instance, the norm at this company, not unusual in the industry, had been to promote people quickly, within 18 months to two years, before they had a chance to see their initiatives through. As a result, managers at every level kept doing their old jobs even after they had been promoted, peering over the shoulders of the direct reports who were now in charge of their projects and, all too frequently, taking over. Today, people stay in their positions longer so they can follow through on their own initiatives, and they're still around when the fruits of their labors start to kick in. What's more, results from those initiatives continue to count in their performance reviews for some time after they've been promoted, forcing managers to live with the expectations they'd set in their previous jobs. As a consequence, forecasting has become more accurate and reliable. These actions did yield a structure with fewer layers and greater spans of control, but that was a side effect, not the primary focus, of the changes.

The Elements of Strong Execution

Our conclusions arise out of decades of practical application and intensive research. Nearly five years ago, we and our colleagues set out to gather empirical data to identify the actions that were most effective in enabling an organization to implement strategy. What particular ways of restructuring, motivating, improving information flows, and clarifying decision rights mattered the most? We started by drawing up a list of 17 traits, each corresponding to one or more of the four building blocks we knew could enable effective execution--traits like the free flow of information across organizational boundaries or the degree to which senior leaders refrain from getting involved in operating decisions. With these factors in mind, we developed an online profiler that allows individuals to assess the execution capabilities of their organizations. Over the next four years or so, we collected data from many thousands of profiles, which in turn allowed us to more precisely calibrate the impact of each trait on an organization's ability to execute. That allowed us to rank all 17 traits in order of their relative influence. (See the exhibit "The 17 Fundamental Traits of Organizational Effectiveness.)

Sidebar Icon The 17 Fundamental Traits of Organizational Effectiveness (Located at the end of this article)

Ranking the traits makes clear how important decision rights and information are to effective strategy execution. The first eight traits map directly to decision rights and information. Only three of the 17 traits relate to structure, and none of those ranks higher than 13th. We'll walk through the top five traits here.

1. Everyone has a good idea of the decisions and actions for which he or she is responsible.

In companies strong on execution, 71% of individuals agree with this statement; that figure drops to 32% in organizations weak on execution.

Blurring of decision rights tends to occur as a company matures. Young organizations are generally too busy getting things done to define roles and responsibilities clearly at the outset. And why should they? In a small company, it's not so difficult to know what other people are up to. So for a time, things work out well enough. As the company grows, however, executives come and go, bringing in with them and taking away different expectations, and over time the approval process gets ever more convoluted and murky. It becomes increasingly unclear where one person's accountability begins and another's ends.

One global consumer-durables company found this out the hard way. It was so rife with people making competing and conflicting decisions that it was hard to find anyone below the CEO who felt truly accountable for profitability. The company was organized into 16 product divisions aggregated into three geographic groups--North America, Europe, and International. Each of the divisions was charged with reaching explicit performance targets, but functional staff at corporate headquarters controlled spending targets--how R&D dollars were allocated, for instance. Decisions made by divisional and geographic leaders were routinely overridden by functional leaders. Overhead costs began to mount as the divisions added staff to help them create bulletproof cases to challenge corporate decisions.

Decisions stalled while divisions negotiated with functions, each layer weighing in with questions. Functional staffers in the divisions (financial analysts, for example) often deferred to their higher-ups in corporate rather than their division vice president, since functional leaders were responsible for rewards and promotions. Only the CEO and his executive team had the discretion to resolve disputes. All of these symptoms fed on one another and collectively hampered execution--until a new CEO came in.

The new chief executive chose to focus less on cost control and more on profitable growth by redefining the divisions to focus on consumers. As part of the new organizational model, the CEO designated accountability for profits unambiguously to the divisions and also gave them the authority to draw on functional activities to support their goals (as well as more control of the budget). Corporate functional roles and decision rights were recast to better support the divisions' needs and also to build the cross-divisional links necessary for developing the global capabilities of the business as a whole. For the most part, the functional leaders understood the market realities--and that change entailed some adjustments to the operating model of the business. It helped that the CEO brought them into the organizational redesign process, so that the new model wasn't something imposed on them as much as it was something they engaged in and built together.

2. Important information about the competitive environment gets to headquarters quickly.

On average, 77% of individuals in strong-execution organizations agree with this statement, whereas only 45% of those in weak-execution organizations do.

Headquarters can serve a powerful function in identifying patterns and promulgating best practices throughout business segments and geographic regions. But it can play this coordinating role only if it has accurate and up-to-date market intelligence. Otherwise, it will tend to impose its own agenda and policies rather than defer to operations that are much closer to the customer.

Consider the case of heavy-equipment manufacturer Caterpillar.^1 Today it is a highly successful $45 billion global company, but a generation ago, Caterpillar's organization was so badly misaligned that its very existence was threatened. Decision rights were hoarded at the top by functional general offices located at headquarters in Peoria, Illinois, while much of the information needed to make those decisions resided in the field with sales managers. "It just took a long time to get decisions going up and down the functional silos, and they really weren't good business decisions; they were more functional decisions," noted one field executive. Current CEO Jim Owens, then a managing director in Indonesia, told us that such information that did make it to the top had been "whitewashed and varnished several times over along the way." Cut off from information about the external market, senior executives focused on the organization's internal workings, overanalyzing issues and second-guessing decisions made at lower levels, costing the company opportunities in fast-moving markets.

Sidebar Icon About the Data (Located at the end of this article)

Pricing, for example, was based on cost and determined not by market realities but by the pricing general office in Peoria. Sales representatives across the world lost sale after sale to Komatsu, whose competitive pricing consistently beat Caterpillar's. In 1982, the company posted the first annual loss in its almost-60-year history. In 1983 and 1984, it lost $1 million a day, seven days a week. By the end of 1984, Caterpillar had lost a billion dollars. By 1988, then-CEO George Schaefer stood atop an entrenched bureaucracy that was, in his words, "telling me what I wanted to hear, not what I needed to know." So, he convened a task force of "renegade" middle managers and tasked them with charting Caterpillar's future.

Ironically, the way to ensure that the right information flowed to headquarters was to make sure the right decisions were made much further down the organization. By delegating operational responsibility to the people closer to the action, top executives were free to focus on more global strategic issues. Accordingly, the company reorganized into business units, making each accountable for its own P&L statement. The functional general offices that had been all-powerful ceased to exist, literally overnight. Their talent and expertise, including engineering, pricing, and manufacturing, were parceled out to the new business units, which could now design their own products, develop their own manufacturing processes and schedules, and set their own prices. The move dramatically decentralized decision rights, giving the units control over market decisions. The business unit P&Ls were now measured consistently across the enterprise, as return on assets became the universal measure of success. With this accurate, up-to-date, and directly comparable information, senior decision makers at headquarters could make smart strategic choices and trade-offs rather than use outdated sales data to make ineffective, tactical marketing decisions.

Within 18 months, the company was working in the new model. "This was a revolution that became a renaissance," Owens recalls, "a spectacular transformation of a kind of sluggish company into one that actually has entrepreneurial zeal. And that transition was very quick because it was decisive and it was complete; it was thorough; it was universal, worldwide, all at one time."

3. Once made, decisions are rarely second-guessed.

Whether someone is second-guessing depends on your vantage point. A more senior and broader enterprise perspective can add value to a decision, but managers up the line may not be adding incremental value; instead, they may be stalling progress by redoing their subordinates' jobs while, in effect, shirking their own. In our research, 71% of respondents in weak-execution companies thought that decisions were being second-guessed, whereas only 45% of those from strong-execution organizations felt that way.

Recently, we worked with a global charitable organization dedicated to alleviating poverty. It had a problem others might envy: It was suffering from the strain brought on by a rapid growth in donations and a corresponding increase in the depth and breadth of its program offerings. As you might expect, this nonprofit was populated with people on a mission who took intense personal ownership of projects. It did not reward the delegation of even the most mundane administrative tasks. Country-level managers, for example, would personally oversee copier repairs. Managers' inability to delegate led to decision paralysis and a lack of accountability as the organization grew. Second-guessing was an art form. When there was doubt over who was empowered to make a decision, the default was often to have a series of meetings in which no decision was reached. When decisions were finally made, they had generally been vetted by so many parties that no one person could be held accountable. An effort to expedite decision-making through restructuring--by collocating key leaders with subject-matter experts in newly established central and regional centers of excellence--became instead another logjam. Key managers still weren't sure of their right to take advantage of these centers, so they didn't.

The nonprofit's management and directors went back to the drawing board. We worked with them to design a decision-making map, a tool to help identify where different types of decisions should be taken, and with it they clarified and enhanced decision rights at all levels of management. All managers were then actively encouraged to delegate standard operational tasks. Once people had a clear idea of what decisions they should and should not be making, holding them accountable for decisions felt fair. What's more, now they could focus their energies on the organization's mission. Clarifying decision rights and responsibilities also improved the organization's ability to track individual achievement, which helped it chart new and appealing career-advancement paths.

4. Information flows freely across organizational boundaries.

When information does not flow horizontally across different parts of the company, units behave like silos, forfeiting economies of scale and the transfer of best practices. Moreover, the organization as a whole loses the opportunity to develop a cadre of up-and-coming managers well versed in all aspects of the company's operations. Our research indicates that only 21% of respondents from weak-execution companies thought information flowed freely across organizational boundaries whereas 55% of those from strong-execution firms did. Since scores for even the strong companies are pretty low, though, this is an issue that most companies can work on.

A cautionary tale comes from a business-to-business company whose customer and product teams failed to collaborate in serving a key segment: large, cross-product customers. To manage relationships with important clients, the company had established a customer-focused marketing group, which developed customer outreach programs, innovative pricing models, and tailored promotions and discounts. But this group issued no clear and consistent reports of its initiatives and progress to the product units and had difficulty securing time with the regular cross-unit management to discuss key performance issues. Each product unit communicated and planned in its own way, and it took tremendous energy for the customer group to understand the units' various priorities and tailor communications to each one. So the units were not aware, and had little faith, that this new division was making constructive inroads into a key customer segment. Conversely (and predictably), the customer team felt the units paid only perfunctory attention to its plans and couldn't get their cooperation on issues critical to multiproduct customers, such as potential trade-offs and volume discounts.

Historically, this lack of collaboration hadn't been a problem because the company had been the dominant player in a high-margin market. But as the market became more competitive, customers began to view the firm as unreliable and, generally, as a difficult supplier, and they became increasingly reluctant to enter into favorable relationships.

Once the issues became clear, though, the solution wasn't terribly complicated, involving little more than getting the groups to talk to one another. The customer division became responsible for issuing regular reports to the product units showing performance against targets, by product and geographic region, and for supplying a supporting root-cause analysis. A standing performance-management meeting was placed on the schedule every quarter, creating a forum for exchanging information face-to-face and discussing outstanding issues. These moves bred the broader organizational trust required for collaboration.

5. Field and line employees usually have the information they need to understand the bottom-line impact of their day-to-day choices.

Rational decisions are necessarily bounded by the information available to employees. If managers don't understand what it will cost to capture an incremental dollar in revenue, they will always pursue the incremental revenue. They can hardly be faulted, even if their decision is--in the light of full information--wrong. Our research shows that 61% of individuals in strong-execution organizations agree that field and line employees have the information they need to understand the bottom-line impact of their decisions. This figure plummets to 28% in weak-execution organizations.

We saw this unhealthy dynamic play out at a large, diversified financial-services client, which had been built through a series of successful mergers of small regional banks. In combining operations, managers had chosen to separate front-office bankers who sold loans from back-office support groups who did risk assessments, placing each in a different reporting relationship and, in many cases, in different locations. Unfortunately, they failed to institute the necessary information and motivation links to ensure smooth operations. As a result, each pursued different, and often competing, goals.

For example, salespeople would routinely enter into highly customized one-off deals with clients that cost the company more than they made in revenues. Sales did not have a clear understanding of the cost and complexity implications of these transactions. Without sufficient information, sales staff believed that the back-end people were sabotaging their deals, while the support groups considered the front-end people to be cowboys. At year's end, when the data were finally reconciled, management would bemoan the sharp increase in operational costs, which often erased the profit from these transactions.

Executives addressed this information misalignment by adopting a "smart customization" approach to sales. They standardized the end-to-end processes used in the majority of deals and allowed for customization only in select circumstances. For these customized deals, they established clear back-office processes and analytical support tools to arm salespeople with accurate information on the cost implications of the proposed transactions. At the same time, they rolled out common reporting standards and tools for both the front- and back-office operations to ensure that each group had access to the same data and metrics when making decisions. Once each side understood the business realities confronted by the other, they cooperated more effectively, acting in the whole company's best interests--and there were no more year-end surprises.

Creating a Transformation Program

The four building blocks that managers can use to improve strategy execution--decision rights, information, structure, and motivators--are inextricably linked. Unclear decision rights not only paralyze decision making but also impede information flow, divorce performance from rewards, and prompt work-arounds that subvert formal reporting lines. Blocking information results in poor decisions, limited career development, and a reinforcement of structural silos. So what to do about it?

Since each organization is different and faces a unique set of internal and external variables, there is no universal answer to that question. The first step is to identify the sources of the problem. In our work, we often begin by having a company's employees take our profiling survey and consolidating the results. The more people in the organization who take the survey, the better.

Once executives understand their company's areas of weakness, they can take any number of actions. The exhibit, "Mapping Improvements to the Building Blocks: Some Sample Tactics" shows 15 possible steps that can have an impact on performance. (The options listed represent only a sampling of the dozens of choices managers might make.) All of these actions are geared toward strengthening one or more of the 17 traits. For example, if you were to take steps to "clarify and streamline decision making" you could potentially strengthen two traits: "Everyone has a good idea of the decisions and actions for which he or she is responsible," and "Once made, decisions are rarely second-guessed."

Sidebar Icon Mapping Improvements to the Building Blocks: Some Sample Tactics (Located at the end of this article)

You certainly wouldn't want to put 15 initiatives in a single transformation program. Most organizations don't have the managerial capacity or organizational appetite to take on more than five or six at a time. And as we've stressed, you should first take steps to address decision rights and information, and then design the necessary changes to motivators and structure to support the new design.

To help companies understand their shortcomings and construct the improvement program that will have the greatest impact, we have developed an organizational-change simulator. This interactive tool accompanies the profiler, allowing you to try out different elements of a change program virtually, to see which ones will best target your company's particular area of weakness. (For an overview of the simulation process, see the sidebar "Test Drive Your Organization's Transformation.")

Sidebar Icon Test-Drive Your Organization's Transformation (Located at the end of this article)

To get a sense of the process from beginning to end--from taking the diagnostic profiler, to formulating your strategy, to launching your organizational transformation--consider the experience of a leading insurance company we'll call Goodward Insurance. Goodward was a successful company with strong capital reserves and steady revenue and customer growth. Still, its leadership wanted to further enhance execution to deliver on an ambitious five-year strategic agenda that included aggressive targets in customer growth, revenue increases, and cost reduction, which would require a new level of teamwork. While there were pockets of cross-unit collaboration within the company, it was far more common for each unit to focus on its own goals, making it difficult to spare resources to support another unit's goals. In many cases there was little incentive to do so anyway: Unit A's goals might require the involvement of Unit B to succeed, but Unit B's goals might not include supporting Unit A's effort.

The company had initiated a number of enterprisewide projects over the years, which had been completed on time and on budget, but these often had to be reworked because stakeholder needs hadn't been sufficiently taken into account. After launching a shared-services center, for example, the company had to revisit its operating model and processes when units began hiring shadow staff to focus on priority work that the center wouldn't expedite. The center might decide what technology applications, for instance, to develop on its own rather than set priorities according to what was most important to the organization.

In a similar way, major product launches were hindered by insufficient coordination among departments. The marketing department would develop new coverage options without asking the claims-processing group whether it had the ability to process the claims. Since it didn't, processors had to create expensive manual work-arounds when the new kinds of claims started pouring in. Nor did marketing ask the actuarial department how these products would affect the risk profile and reimbursement expenses of the company, and for some of the new products, costs did indeed increase.

To identify the greatest barriers to building a stronger execution culture, Goodward Insurance gave the diagnostic survey to all of its 7,000-plus employees and compared the organization's scores on the 17 traits with those from strong-execution companies. Numerous previous surveys (employee-satisfaction, among others) had elicited qualitative comments identifying the barriers to execution excellence. But the diagnostic survey gave the company quantifiable data that it could analyze by group and by management level to determine which barriers were most hindering the people actually charged with execution. As it turned out, middle management was far more pessimistic than the top executives in their assessment of the organization's execution ability. Their input became especially critical to the change agenda ultimately adopted.

Through the survey, Goodward Insurance uncovered impediments to execution in three of the most influential organizational traits:

Contributing to this lack of horizontal information flow was a dearth of lateral promotions. Because Goodward had always promoted up rather than over and up, most middle and senior managers remained within a single group. They were not adequately apprised of the activities of the other groups, nor did they have a network of contacts across the organization.

To Goodward's credit, its top executives immediately responded to the results of the diagnostic by launching a change program targeted at all three problem areas. The program integrated early, often symbolic, changes with longer-term initiatives, in an effort to build momentum and galvanize participation and ownership. Recognizing that a passive-aggressive attitude toward people perceived to be in power solely as a result of their position in the hierarchy was hindering information flow, they took immediate steps to signal their intention to create a more informal and open culture. One symbolic change: the seating at management meetings was rearranged. The top executives used to sit in a separate section, the physical space between them and the rest of the room fraught with symbolism. Now they intermingled, making themselves more accessible and encouraging people to share information informally. Regular brown-bag lunches were established with members of the C-suite, where people had a chance to discuss the overall culture-change initiative, decision rights, new mechanisms for communicating across the units, and so forth. Seating at these events was highly choreographed to ensure that a mix of units was represented at each table. Icebreaker activities were designed to encourage individuals to learn about other units' work.

Meanwhile, senior managers commenced the real work of remedying issues relating to information flows and decision rights. They assessed their own informal networks to understand how people making key decisions got their information, and they identified critical gaps. The outcome was a new framework for making important decisions that clearly specifies who owns each decision, who must provide input, who is ultimately accountable for the results, and how results are defined. Other longer-term initiatives include:

Goodward Insurance has just embarked on this journey. The insurer has distributed ownership of these initiatives among various groups and management levels so that these efforts don't become silos in themselves. Already, solid improvement in the company's execution is beginning to emerge. The early evidence of success has come from employee-satisfaction surveys: Middle management responses to the questions about levels of cross-unit collaboration and clarity of decision making have improved as much as 20 to 25 percentage points. And high performers are already reaching across boundaries to gain a broader understanding of the full business, even if it doesn't mean a better title right away.

Execution is a notorious and perennial challenge. Even at the companies that are best at it--what we call "resilient organizations"--just two-thirds of employees agree that important strategic and operational decisions are quickly translated into action. As long as companies continue to attack their execution problems primarily or solely with structural or motivational initiatives, they will continue to fail. As we've seen, they may enjoy short-term results, but they will inevitably slip back into old habits because they won't have addressed the root causes of failure. Such failures can almost always be fixed by ensuring that people truly understand what they are responsible for and who makes which decisions--and then giving them the information they need to fulfill their responsibilities. With these two building blocks in place, structural and motivational elements will follow.

1. The details for this example have been taken from Gary L. Neilson and Bruce A. Pasternack, Results: Keep What's Good, Fix What's Wrong, and Unlock Great Performance (Random House, 2005). What Matters Most to Strategy Execution

When a company fails to execute its strategy, the first thing managers often think to do is restructure. But our research shows that the fundamentals of good execution start with clarifying decision rights and making sure information flows where it needs to go. If you get those right, the correct structure and motivators often become obvious.

The 17 Fundamental Traits of Organizational Effectiveness

From our survey research drawn from more than 26,000 people in 31 companies, we have distilled the traits that make organizations effective at implementing strategy. Here they are, in order of importance.

About the Data

We tested organizational effectiveness by having people fill out an online diagnostic, a tool comprising 19 questions (17 that describe organizational traits and two that describe outcomes). To determine which of the 17 traits in our profiler are most strongly associated with excellence in execution, we looked at 31 companies in our database for which we had responses from at least 150 individual (anonymously completed) profiles, for a total of 26,743 responses. Applying regression analysis to each of the 31 data sets, we correlated the 17 traits with our measure of organizational effectiveness, which we defined as an affirmative response to the outcome statement, "Important strategic and operational decisions are quickly translated into action." Then we ranked the traits in order, according to the number of data sets in which the trait exhibited a significant correlation with our measure of success within a 90% confidence interval. Finally, we indexed the result to a 100-point scale. The top trait--"Everyone has a good idea of the decisions and actions for which he or she is responsible"--exhibited a significant positive correlation with our success indicator in 25 of the 31 data sets, for an index score of 81. Mapping Improvements to the Building Blocks: Some Sample Tactics

Companies can take a host of steps to improve their ability to execute strategy. The 15 here are only some of the possible examples. Every one strengthens one or more of the building blocks executives can use to improve their strategy-execution capability: clarifying decision rights, improving information, establishing the right motivators, and restructuring the organization.

Test-Drive Your Organization's Transformation

You know your organization could perform better. You are faced with dozens of levers you could conceivably pull if you had unlimited time and resources. But you don't. You operate in the real world.

How, then, do you make the most-educated and cost-efficient decisions about which change initiatives to implement? We've developed a way to test the efficacy of specific actions (such as clarifying decision rights, forming cross-functional teams, or expanding nonmonetary rewards) without risking significant amounts of time and money. You can go to www.simulator-orgeffectiveness.com to assemble and try out various five-step organizational-change programs and assess which would be the most effective and efficient in improving execution at your company.

You begin the simulation by selecting one of seven organizational profiles that most resembles the current state of your organization. If you're not sure, you can take a five-minute diagnostic survey. This online survey automatically generates an organizational profile and baseline execution-effectiveness score. (Although 100 is a perfect score, nobody is perfect; even the most effective companies often score in the 60s and 70s.)

Having established your baseline, you use the simulator to chart a possible course you'd like to take to improve your execution capabilities by selecting five out of a possible 28 actions. Ideally, these moves should directly address the weakest links in your organizational profile. To help you make the right choices, the simulator offers insights that shed further light on how a proposed action influences particular organizational elements.

Once you have made your selections, the simulator executes the steps you've elected and processes them through a web-based engine that evaluates them using empirical relationships identified from 31 companies representing more than 26,000 data observations. It then generates a bar chart indicating how much your organization's execution score has improved and where it now stands in relation to the highest-performing companies from our research and the scores of other people like you who have used the simulator starting from the same original profile you did. If you wish, you may then advance to the next round and pick another five actions. What you will see is illustrated above.

The beauty of the simulator is its ability to consider--consequence-free--the impact on execution of endless combinations of possible actions. Each simulation includes only two rounds, but you can run the simulation as many times as you like. The simulator has also been used for team competition within organizations, and we've found that it engenders very engaging and productive dialogue among senior executives.

While the simulator cannot capture all of the unique situations an organization might face, it is a useful tool for assessing and building a targeted and effective organization-transformation program. It serves as a vehicle to stimulate thinking about the impact of various changes, saving untold amounts of time and resources in the process.

The Next Revolution in Productivity

Trapped inside your company's processes are activities that can now be swapped, bought, and sold. If you liberate them, you can create a radically more efficient plug-and-play business.

by Ric Merrifield, Jack Calhoun, and Dennis Stevens

Businesses have been reengineering their processes for nearly 20 years. For many companies, knitting together numerous fragmented tasks and data into cross-functional business processes has had a substantial impact in terms of cost savings, cycle-time reductions, and service improvements. However, many companies that embraced the reengineering revolution are now hitting a wall. Fortunately, the means to break through that wall are emerging. Thanks to the development of new technologies for using and sharing functions via the internet, the frontier is no longer the process but rather the business activities that make up every process--from pricing a product to issuing an invoice to assessing the risk of individual customers to prioritizing the potential features of a new product in development.

It is becoming possible to design many business activities as Lego-like software components that can be easily put together and taken apart. What's primarily responsible is service-oriented architecture, a relatively new way of designing and deploying the software that supports a business activity. The beauty of SOA is that it allows activities--or processes built from such activities--to be accessed using the now-ubiquitous internet in a standardized fashion. Whether the capabilities that make up an activity are manual, fully automated, or somewhere in between, the SOA-based design of their underlying software or electronic user interface allows the activity to be turned into a de facto web service. This transformation makes it vastly easier to share discrete activities and entire processes internally, to buy or sell them externally, to delegate their execution to suppliers or customers, and to update and maintain IT systems.

That said, obstacles to using SOA in this way exist. One is the lack of a universal standard: Vendors and industries currently use different versions of SOA. This is not a major issue, though, because systems using those various versions can converse with one another about most activities. Moreover, all signs suggest that SOA will become a standard overseen by a governing body of professionals. "The world is rapidly moving in that direction," says Mark Baciak, a senior technology architect at Microsoft, who pioneered SOA work at the software giant and several of its large customers.

A bigger obstacle is a familiar one: the gulf between corporate leaders and their IT departments. Chief executives have tended to see SOA as merely the next big thing being pushed by their CIOs and to assume that it, too, will end up costing a fortune without delivering commensurate benefits. Partly because of this fear and partly because CIOs have not understood or have had trouble articulating what SOA makes possible, most CEOs have authorized their IT departments to deploy it in a limited fashion--to improve and lower the cost of maintaining the software supporting existing processes. As a result, most companies that have embraced SOA have applied it without first rethinking the design of their businesses. This omission means they have overlooked SOA's greatest value: the opportunity to create much more focused, efficient, and flexible organizational structures.

Companies with which we have worked that have applied SOA only after redesigning their operations have eliminated huge amounts of redundant software, reaped major cost savings from simplifying and automating manual processes, and realized big increases in productivity. Harvard Pilgrim Health Care, the insurer, was able to shift nonstrategic, or noncore, activities such as pharmacy-benefits management and disease diagnosis to companies that perform them better. Motorola's mobile-phone business recently identified ways to standardize the previously proprietary processes of its customer-service call centers, allowing them to share software and cut their collective annual operating costs by millions of dollars. And in a test case that helped Baciak sell Microsoft on SOA, the software giant invested $1.25 million in an SOA project that cut the annual cost of maintaining one set of IT systems by more than $3 million.

Achieving such gains, however, requires a sea change in operations-improvement techniques. In essence, it calls for the transformation of companies from collections of proprietary operations into a collection of standard plug-and-play activities.

The Value of Service-Oriented Architecture

Over the past 25 years, rapid advances in IT and operations design and practices revolutionized the way organizations conducted business and yielded huge productivity gains. The widespread adoption of quality-improvement methods such as total quality management and Six Sigma reduced waste and defects. Capitalizing on information technology, reeingineering, and other process-redesign techniques helped organizations eliminate some tasks and integrate others that had been imprisoned in functional silos. The result was much more efficient, cross-functional processes for procuring supplies, taking and fulfilling orders, manufacturing products, providing services, delivering offerings to customers, and so on. Collectively, these innovations have helped companies reduce costs by hundreds of millions--sometimes even billions--of dollars, cut order-delivery times by 50% or more, and significantly boost quality.

For the most part, however, reengineering has involved recasting processes and the information systems that support them in a proprietary, rather than a standardized, form--that is, customized for individual organizations. Such designs make it difficult and expensive for businesses to share, consolidate, and change processes. For example, you can't rip out FedEx's order-fulfillment process and the computer systems behind it (or any component of the process or the systems) and plug them into another company. That limitation has made it tough for FedEx to integrate the many logistics companies it has acquired.

Proprietary design, together with technology constraints that existed until recently, have kept the constituent activities of a process locked within it. Therefore, the activities could not be easily shared across processes or businesses. The result: Virtually all large companies suffer from an enormous duplication of activities; they continue to create and perform hundreds of noncore tasks that would ideally be outsourced; and they are spending exorbitant amounts on IT projects in order to support redundant and nonstrategic operations and to update core processes.

Imagine if a car manufacturer designed its motors and all the supporting parts (alternator, radiator, fuel pump, battery, and so on) so that it was impossible to replace one piece without replacing the whole system. That's the state of business processes at the vast majority of companies: They are monolithic operations supported by software that is not easy to replace piece by piece--especially if they use cross-functional "enterprise" software packages. Just replacing a pricing calculator, for example, requires an absurd amount of time and money.

One reason that reengineering focused on creating better proprietary processes is that 20 years ago, in the early days of the process-redesign revolution, the internet was not what it is today: an omnipresent computer network that allows organizations of all sizes, whether in Minneapolis or Mumbai, to easily and inexpensively plug into the same software modules. The only way to share pricing, accounts receivable, marketing, sales, and other capabilities that were automated or at least had electronic user interfaces was to build or lease a private network; for most companies, that did not make economic sense.

Also missing until this decade were methods of designing computer systems that permit capabilities to be shared over the internet as web services. That's the essence of SOA: It provides guidelines that allow software developers to design systems in stand-alone chunks of computer code, each specifying the critical outcomes, performance metrics, and interfaces between a discrete activity and other services. Consider a web service that one manufacturer installed to verify zip codes for its direct-mail marketing campaigns. The specified outcome was "validate zip code"--in other words, make sure mail-ings were not misdelivered. The two key metrics for this service were the accuracy rate of mailings (determined by the number returned because of incorrect zip codes) and the frequency with which the software found the right zip code for returned mailings. Specified interfaces included those with the "update customer address" and "handle returned mail" services.

When software is designed this way and placed on an intranet or the internet, anyone using SOA--any business unit in a firm and any customer or supplier--can plug in or remotely access the same software. Five divisions can use the same pricing calculator, eliminating the need for five separate systems. Outsourcing noncore activities becomes extremely easy. These attributes make SOA-based software far superior to both the customized software supporting proprietary processes and so-called "off-the-shelf" enterprise software packages.

Airline check-in is a good example of what this new world looks like. A standard interface allows passengers to check in for flights on their personal computers, at an electronic airport kiosk, or through a customer-service representative using a console. It does not matter to the customer what's happening behind the interface--who is supplying the capabilities and how--as long as she has a satisfactory outcome. If the airline can find an organization that can produce the required outcome at a lower cost, it can simply buy and plug in that service. And when a superior provider comes along, the airline can easily unplug the existing service and plug in the new one. This is not science fiction; at least one major airline is doing it already. However, the reality is that a complex function like flight check-in is not just one activity or service but, rather, a bundle of several that can be independently swapped or reused in other functions.

Unfortunately, few companies are using SOA to create more productive and focused organizations or to slash costs by purging duplicative operations and technologies. They are not revisiting the fundamental design of their operations.

Rethinking Operations

Turning companies into plug-and-play businesses is easier than reengineering in some ways and more challenging in others. It's easier because it doesn't have to be done in a big bang: Individual SOA projects tend to be of much smaller scope and shorter duration, and have a faster payback, than reengineering projects. What's more, turning a business into a collection of loosely coupled activities does not require that monolithic enterprise resource planning or customer-relationship management systems be overhauled or ripped out. To the contrary, when SOA is placed on top of them, it unlocks their proprietary language, making them more accessible.

Moving into the plug-and-play world is more challenging than reengineering because it requires more-profound operational and technological changes: for divisions to share operations and software, for companies to outsource far more than they do, and for business units to shift operations to customers and suppliers. Indeed, managers must adopt a whole new approach to operations design, which starts with a new unit of operational analysis--the level at which a company's operations troubleshooters diagnose and solve operational problems.

In the late nineteenth century, the unit of analysis was the worker's task, the efficiency of which Frederick Taylor's time and motion studies improved. Sixty or so years later, with the arrival of the mainframe computer, the key unit became the department. Then, in the late 1980s and early 1990s, when cheap PCs and internal networks allowed companies to connect departments economically, it became the cross-functional process. In the age of the internet and SOA, the unit of analysis is not a company's way of conducting its operations at all; it is the primary purpose or desired outcome of each activity, no matter how that activity is accomplished. For example, every company has either an internal or outsourced payroll process with a fundamental purpose of paying employees. Other common activities are capture customer orders, secure supply, forecast demand, and plan replenishment. From a mile-high view, the operations of a typical large company comprise five to seven areas, 20 to 40 activities, 150 to 350 capabilities, and more than 1,000 subcapabilities.

One of the biggest challenges in identifying duplications in work and technology is that the same or similar activities are often called by different names, even within the same company. Defining a company's operations in terms of the outcomes or purposes of its activities helps to solve that problem. It allows managers, operations designers, and technologists to see with crystal clarity the work--the operations and supporting technology--that their company's units, their customers, and their suppliers are duplicating. They can then identify which activities are strategic because they provide competitive advantage and should be kept in-house, which might be offered as services to other companies, which should be outsourced, and which of those retained need to be strengthened.

Only with this kind of atomic view can executives set priorities for initiatives to improve operations and their supporting technology. The method is pretty straightforward. We call it a business capabilities analysis.

Conducting a Business Capabilities Analysis

The first step involves drawing a diagram of the activities, capabilities, and subcapabilities in your business. Collaborating with the people who run a particular area of the business, you should describe its operations in terms of outcomes or fundamental purposes. This is easier said than done because people are used to describing the work they do ("We send a customer an invoice that requests on-time payment") and how they do it ("We check the order against our invoice. Then we call the customer to ask who should receive the invoice and how we should send it. On the due date, we check to see whether we have been paid."). They are not accustomed to talking about its fundamental purpose or outcome ("bill customer" or "collect customer payment").

The next task is to describe the crucial capabilities that support most of your business activities, including all the key ones. For the area "generate demand," the managers at one financial services firm listed three activities: manage partner relationships, market products and services, and sell products and services. We then asked them what capabilities supported each. They came up with seven, for instance, for sell products and services: manage orders, manage sales, manage immediately filled sales, configure product pricing, manage contracts, qualify prospects, and conduct business intelligence. In all, it took about three weeks to define the entire company's capabilities and subcapabilities.

After mapping out the activities in your operations and the capabilities involved in carrying them out, it's time to identify the activities most critical to your company's success and to assess the health of all activities. If the executive team has a general understanding of what drives revenue and profitability in the organization, the first task typically takes only two to four weeks. Even if executives agree on the drivers, however, they might find it valuable to bounce their perceptions off other people in the organization (functional heads, customer-facing managers, and workers) as well as customers, partners, and suppliers.

Because this exercise differs radically from operations-improvement methods that are now widely employed, we suggest starting small--with one or two groups of capabilities in a specific part of the business--in order to acclimate functional heads who must play a central role in the effort. This will challenge their mind-sets, get them thinking about what SOA-based systems should or should not be built, and help them understand the magnitude of the organizational changes that lie ahead. Typically, such initial efforts, which require only a couple of full-time people, can identify substantial opportunities for improvement in six to 10 weeks.

There are three basic criteria for determining which activities are most important to your business, which have underlying capabilities that need to be improved, and which are candidates to become web services:

An important aspect of predictability is that some activities have inherently more unpredictable outcomes than others. Online companies like Amazon have highly predictable customer-ordering activities: When a customer orders online and provides the required information (including name, address, product selection, and credit card number), Amazon knows with certainty that the customer has committed to this specific order. In contrast, a management consultancy has trouble predicting precisely how many customers will say yes to its proposals and whether a particular customer wants exactly what the proposal offers.

The managers leading your company's effort now can use the results of this analysis to produce a heat map: a diagram that lays out all the firm's activities and identifies those that are critical and those whose capabilities need to be improved. Of course, the capabilities to focus on first are the poor performers whose value to the business is high. (See the exhibit "Identifying Your Top Priorities.")

Sidebar Icon Identifying Your Top Priorities (Located at the end of this article)

After piloting a capabilities analysis in one small part of its operations, a multibillion-dollar U.S. distribution company decided to create a heat map of its entire business. In particular, it wanted to know which capabilities were critical for fulfilling a mandate from its biggest supplier to dramatically improve satisfaction among the retailers and consumers who bought the supplier's products. The analysis parsed the firm's vast operations into about 20 activities and 140 capabilities. After asking managers in those areas about the value, performance, and predictability of each, they identified three activities with a total of 14 capabilities as the leading candidates for improvement--the ones with the greatest value, the most predictable outcomes, and the worst performance. Because 14 were too many to tackle at once, they decided to ask retailers what they thought the priorities should be. Three capabilities emerged: fix sloppy order fulfillment so that the right shipments go to the right retailers at the right time; give retailers sufficient marketing collateral to persuade consumers to buy the distributor's accessories; and track product sales more rigorously to help retailers weed out poor performers faster.

At this point, the distributor analyzed the people, processes, and IT of the three activities in depth. The solution for improving order fulfillment involved training retailers to use the existing technology; automation was the answer for tracking product sales. Not all the solutions identified were new. For example, some managers had long pushed the company to install product-information software to support the management and distribution of marketing collateral, but not until the capabilities analysis had been conducted did the business case for making the investment seem compelling.

Only after tackling these three priorities did the distributor return to the remaining 11. Although its overall improvement program is still a work in progress, customer satisfaction has already increased substantially.

One lesson of this story is that the heat map is strictly a tool for identifying priorities. By providing an overview of all the activities in a business, it can help managers throughout the organization agree on priorities for an improvement program--but managers must think long and hard about how many the company can realistically take on at one time. Otherwise, the program may go nowhere fast. A second lesson is that automation, including the implementation of SOA, is a means to an end and not an end in itself. Notably, the distributor decided what to automate--and where to apply SOA--only after it had chosen the capabilities whose improvement was most critical to achieving its business objective.

Creating a New Operating Model

With the heat map of activities in hand, managers will have much or most of the information they need to design a new operating model. They might want to probe a bit more--for example, to ascertain whether apparently similar activities in two areas are really the same, to check whether a standard process already exists, or to understand just how intertwined (or independent) activities are. Satisfied that they have an accurate picture of all activities, managers can then place them in one or more of the following categories:

We typically find that as many as 20% of activities are primary and that 25% to 50% of all activities can be shared or shifted to external parties. The CIO of one manufacturer initially thought that only two divisions had redundant marketing data systems and subscription services but ultimately discovered that 12 divisions did. Consolidating them into an SOA-based system that all 12 could share cut the annual technology and data-subscription budget by $40 million, allowed the company to redeploy 63 of the 70 staff members who initially supported the 12 systems, and made the new system accessible to divisions that previously could not afford a system.

A business capabilities analysis conducted in 2000 helped Charles Baker, Harvard Pilgrim's then-new CEO, realize that he could transfer 40% of the insurer's operations to other companies that could perform them better. The heat map showed, for example, that one of the firm's most important capabilities was identifying subscribers who were in the early stages or at high risk of developing chronic illnesses like diabetes and heart disease. Spotting these people early would enable Harvard Pilgrim to enroll them in preventive care or disease-management programs before their conditions became serious. That, however, required sophisticated data-mining and data-analysis technology that could comb through claims and other information. Recognizing that it lacked the technology and the analytical expertise, the insurer moved those activities to an outside specialist.

In the end, Harvard Pilgrim decided to focus its attention and resources on improving distinctive capabilities that provide a competitive advantage: customer service, creating new products, pricing health insurance (actuarial services), contracting doctors to participate in its network, selling to large groups, and marketing directly to individual policyholders. It had outside experts take over pharmacy-benefits management, several disease-management programs, behavioral health management, and claims processing. With the benefit of the capabilities-analysis results, the company could spell out precisely what it expected its dozens of contractors to deliver in terms of quality, cost, volume, and cycle time--and then could closely track their success in achieving that. Three separate finance organizations and their systems were consolidated into one.

Thanks in part to the business capabilities analysis, Harvard Pilgrim's streamlining of its operations has paid off. The insurer, which was on the verge of bankruptcy in 2000, is now solidly in the black, has a host of loyal customers, and has repeatedly received top awards or rankings for the quality of its services and customer satisfaction.

As we hope is abundantly clear by now, creating a new operating model does not begin with building or buying SOA software. In fact, that is the last step--one you should take only after you have identified your company's primary activities and determined which have capabilities or interfaces that can be computerized. While no two companies are alike, we know of some that cut their annual IT budgets by 20% by saving the automation decision for last.

However, once you've identified primary activities whose outcomes are inherently predictable, you should move aggressively to apply SOA. Though it can be as expensive to install as any large software application, the investment will be worth it. SOA-based software can usually be updated in less than half the time needed for other software. After all, you can just plug in the new module without overhauling the software of related activities.

Barriers to Creating Plug-and-Play Businesses

Gartner, the IT research and consulting firm, reports that more than half of the mission-critical systems companies built in 2007 were based on SOA principles, and it predicts that the figure will exceed 80% by 2010. Shifting to the world of SOA will be anything but easy, however. Adopting this new model requires a new mind-set for those who have been at the nexus of process improvement and technology. We compare it to the change that architects and engineers in the mid-1800s had to make after the arrival of the two biggest construction technology breakthroughs of that century: high-strength steel and electric elevators. They took 30 years to realize that these great advances meant they could build skyscrapers.

In a similar way, breakthroughs in networking technology and software-building techniques are unleashing a revolution in how operations are designed. However, most managers are still using the operating model of the twentieth century: They continue to define their activities and processes in a customized, proprietary fashion, and they continue to build software in ways that mean entire systems must be thrown out when a part has to be replaced.

The leaders of companies are another obstacle to change. Many view the debates about SOA as arcane technical discussions that need not concern them. They're anything but that. Decisions about what business capabilities to eliminate or shift to customers, suppliers, and outsourcing firms should not be left to the operating divisions. Our experience has shown that many division heads and their direct reports have trouble letting go of activities--they either overestimate their importance or fear that sharing or outsourcing them will jeopardize the unit's performance. Consequently, the CEO must be deeply involved in deciding which work to do in-house, which duplications to eliminate, and which work to shift to outsiders. The CEO can and should be spared the process and technical details, but at the end of the day, he or she is the chief business architect.

New ways of constructing software combined with a computer network that can distribute the modules instantaneously anywhere in the world give executives unprecedented tools for building ultra-efficient and flexible operations. The business leaders who are willing to pioneer plug-and-play businesses will fuel the next great leap in corporate productivity. Identifying Your Top Priorities

This greatly simplified heat map of a company's "fulfill demand" area includes five activities--manage customer support, plan fulfillment, procure raw materials, produce products, and ship products--and their associated capabilities. For each area, activity, and capability, the strip on top identifies the value to the business (high, intermediate, or low), and the color of the box indicates the current performance. Any element that is of high value to the business and whose performance requires attention is a top priority for an improvement program. (An analysis of which activities could become web services has not been mapped.)

Design Thinking

Thinking like a designer can transform the way you develop products, services, processes--and even strategy.

by Tim Brown

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.")

Sidebar Icon A Design Thinker's Personality Profile (Located at the end of this article)

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 prototyped services, as we did at Kaiser.)

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.

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, "

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.

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.

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.

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.

Sidebar Icon Coasting (Located at the end of this article)

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.

Sidebar Icon Aravind (Located at the end of this article)

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 emotionally and 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.

Sidebar Icon How to Make Design Thinking Part of the Innovation Drill (Located at the end of this article)

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. A Design Thinker's Personality Profile

Contrary to popular opinion, you don't need weird shoes or a black turtleneck to be a design thinker. Nor are design thinkers necessarily created only by design schools, even though most professionals have had some kind of design training. My experience is that many people outside professional design have a natural aptitude for design thinking, which the right development and experiences can unlock. Here, as a starting point, are some of the characteristics to look for in design thinkers:

Empathy. They can imagine the world from multiple perspectives--those of colleagues, clients, end users, and customers (current and prospective). By taking a "people first" approach, design thinkers can imagine solutions that are inherently desirable and meet explicit or latent needs. Great design thinkers observe the world in minute detail. They notice things that others do not and use their insights to inspire innovation.

Integrative thinking. They not only rely on analytical processes (those that produce either/or choices) but also exhibit the ability to see all of the salient--and sometimes contradictory--aspects of a confounding problem and create novel solutions that go beyond and dramatically improve on existing alternatives. (See Roger Martin's The Opposable Mind: How Successful Leaders Win Through Integrative Thinking.)

Optimism. They assume that no matter how challenging the constraints of a given problem, at least one potential solution is better than the existing alternatives.

Experimentalism. Significant innovations don't come from incremental tweaks. Design thinkers pose questions and explore constraints in creative ways that proceed in entirely new directions.

Collaboration. The increasing complexity of products, services, and experiences has replaced the myth of the lone creative genius with the reality of the enthusiastic interdisciplinary collaborator. The best design thinkers don't simply work alongside other disciplines; many of them have significant experience in more than one. At IDEO we employ people who are engineers and marketers, anthropologists and industrial designers, architects and psychologists. Coasting

A sketch (left, seat plus helmet storage) and a prototype (middle) show elements of Coasting bicycles. Shimano's Coasting website (right) points users to safe bike paths.

Aravind

Aravind's outreach to rural patients frequently brings basic diagnostic tools (left and center) and an advanced satellite-linked telemedicine truck (right) to remote areas of India.

How to Make Design Thinking Part of the Innovation Drill

Begin at the beginning. Involve design thinkers at the very start of the innovation process, before any direction has been set. Design thinking will help you explore more ideas more quickly than you could otherwise.

Take a human-centered approach. Along with business and technology considerations, innovation should factor in human behavior, needs, and preferences. Human-centered design thinking--especially when it includes research based on direct observation--will capture unexpected insights and produce innovation that more precisely reflects what consumers want.

Try early and often. Create an expectation of rapid experimentation and prototyping. Encourage teams to create a prototype in the first week of a project. Measure progress with a metric such as average time to first prototype or number of consumers exposed to prototypes during the life of a program.

Seek outside help. Expand the innovation ecosystem by looking for opportunities to co-create with customers and consumers. Exploit Web 2.0 networks to enlarge the effective scale of your innovation team.

Blend big and small projects. Manage a portfolio of innovation that stretc