The business value of Design
How do the best performers increase their revenues and shareholder returns at nearly twice the rate of their industry counterparts?
We all know examples of bad product and service design. The USB plug (always lucky on the third try). The experience of rushing to make your connecting flight at many airports. The exhaust port of the Death Star in Star Wars.
We also know iconic designs, such as the Swiss Army Knife, the humble Google home page, or the Disneyland visitor experience. All of these are constant reminders of the way strong design can be at the heart of both disruptive and sustained commercial success in physical, service, and digital settings.
Despite the obvious commercial benefits of designing great products and services, consistently realizing this goal is notoriously hard - and getting harder. Only the very best designs now stand out from the crowd, given the rapid rise in consumer expectations driven by the likes of Amazon; instant access to global information and reviews; and the blurring of lines between hardware, software, and services. Companies need stronger design capabilities than ever before.
So how do companies deliver exceptional designs, launch after launch? What is Design worth? To answer these questions, extensive and rigorous research to study the design actions that leaders can make to unlock business value was conducted. The intention was to build upon and strengthen, previous studies and indices, such as those from the Design Management Institute.
McKinsey tracked the design practices of 300 publicly listed companies over five years in multiple countries and industries. Their senior business and design leaders were interviewed or surveyed. Their team collected more than two million pieces of financial data and recorded more than 100,000 design actions. Advanced regression analysis uncovered the 12 actions showing the greatest correlation with improved financial performance and clustered these actions into four broad themes.
The four themes of good design described below form the basis of the McKinsey Design Index (MDI), which rates companies by how strong they are at design and how that links up with the financial performance of each company.
Companies with top-quartile MDI scores outperformed industry-benchmark growth by as much as two to one.
McKinsey research yielded several striking findings:
They found a strong correlation between high MDI scores and superior business performance. Top-quartile MDI scores increased their revenues and total returns to shareholders (TRS) substantially faster than their industry counterparts did over five years - 32% percentage points higher revenue growth and 56 percentage points higher TRS growth for the period as a whole.
The results held in all three of the industries they looked at medical technology, consumer goods, and retail banking. This suggests that good design matters whether your company focuses on physical goods, digital products, services, or some combination of these.
TRS and revenue differences between the fourth, third, and second quartiles were marginal. In other words, the market disproportionately rewarded companies that truly stood out from the crowd.
Higher MDI scores correlated with higher revenue growth and, for the top quartile, higher returns to shareholders.
An elusive prize
In short, the potential for design-driven growth is enormous in both product and service-based sectors. The good news is that there are more opportunities than ever to pursue user-centric, analytically informed design today. Customers can feed opinions back to companies (and to each other) in real-time, allowing design to be measured by customers themselves-whether or not companies want to listen.
The financial outperformance of top-quartile companies holds across the three industries studied.
Lean start-ups have demonstrated how to make better decisions through prototyping and iterative learning. Vast repositories of user data and the advance of artificial intelligence (AI) have created powerful new sources of insights and unlocked the door for new techniques, such as computational design and analytics to value. Fast access to real customers is readily available through multiple channels, notably social media and smart devices. All of these developments should place the user at the heart of business decisions in a way that design leaders have long craved.
What the research demonstrates, however, is that many companies have been slow to catch up. Over 40 percent of the companies surveyed still aren't talking to their end users during development. Just over 50 percent admitted that they have no objective way to assess or set targets for the output of their design teams. With no clear way to link design to business health, senior leaders are often reluctant to divert scarce resources to design functions. That is problematic because many of the key drivers of the strong and consistent design environment identified in our research call for company-level decisions and investments. While many designers are acutely aware of some or all of the four MDI themes, these typically can't be tackled by designers alone and often take years of leadership commitment to establish.
The Value of design
It's analytical leadership
Measure and drive design performance with the same rigor as revenues and costs.
More than a feeling
It's cross-functional talent
Make user-centric design everyone's responsibility, not a siloed function.
More than a Department
It's continuous iteration
De-risk development by continually listening, testing, and iterating with end-users.
More than a Phase
It's user experience
Break down internal walls between physical, digital, and service design.
More than a Product
Top-quartile companies in design (and leading financial performers) excelled in all four areas. What's more, leaders appear to have an implicit understanding of the MDI themes. When senior executives were asked to name their organizations' single greatest design weakness, 98 percent of the responses mapped to the four themes of the MDI.
Analytical Leadership
Create a bold, user-centric strategy
Embed design in the C-suite
Employ design metrics
Cross-functional talent
Nurture top design talent
Convene cross-functional teams
Invest in design tools and infrastructure
Continuous iteration
Balance qualitative and quantitative user research
Integrate user, business, competitor, and technological research
Test, refine, repeat. Fast!
User experience
Start with the user, not the spec
Design a seamless physical, service, and digital user experience
Integrate with third-party products and services
In conclusion, companies that tackle these four priorities boost their odds of becoming more creative organizations that consistently design great products and services. For companies that make it into the top quartile of MDI scorers, the prizes are as rich as doubling their revenue growth and shareholder returns over those of their industry counterparts.