The business value of design

Here is a brief excerpt from an article written by Benedict Sheppard, Hugo Sarrazin, Garen Kouyoumjian and Fabricio Dore for the McKinsey Quarterly, published by McKinsey & Company. To read the complete article, check out other resources, learn more about the firm, obtain subscription information, and register to receive email alerts, please click here.

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How do the best design 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 on the Death Star in Star Wars.

We also all 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, we have conducted what we believe to be (at the time of writing) the most extensive and rigorous research undertaken anywhere to study the design actions that leaders can make to unlock business value. Our intent was to build upon, and strengthen, previous studies and indices, such as those from the Design Management Institute.

We tracked the design practices of 300 publicly listed companies over a five-year period in multiple countries and industries. Their senior business and design leaders were interviewed or surveyed. Our team collected more than two million pieces of financial data and recorded more than 100,000 design actions.1 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—for the first time—how that links up with the financial performance of each company (Exhibit 1).

The top-quartile companies in the McKinsey Design Index outperformed industry-benchmark growth by as much as two to one.

Our research yielded several striking findings:

  1. We found a strong correlation between high MDI scores and superior business performance. Top-quartile MDI scorers increased their revenues and total returns to shareholders (TRS) substantially faster than their industry counterparts did over a five-year period—32 percentage points higher revenue growth and 56 percentage points higher TRS growth for the period as a whole.
  2. The results held true in all three of the industries we 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.
  3. 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 (Exhibit 2).
Higher scores in the McKinsey Design Index 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 (Exhibit 3). 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 true 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 our 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 (Exhibit 4a), these typically can’t be tackled by designers alone and often take years of leadership commitment to establish.

Value of Design

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 (Exhibit 4b).

When senior executives were asked to name their organization’s single greatest design weakness, their unprompted responses indicated an implicit understanding of the four themes.

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Here is a direct link to the complete article.

Benedict Sheppard is a partner in McKinsey’s London office, where Garen Kouyoumjian is a consultant; Hugo Sarrazin is a senior partner in the Silicon Valley office; and Fabricio Dore is an associate partner in the São Paulo office.

The authors wish to thank Becca Coggins, Volker Grüntges, and Michael Silber for their tireless support of the research behind this article. They also wish to thank Maxim Berdutin, Markus Berger-de León, John Edson, Sarah Greenberg, Rupert Lee, Randy Lim, Drew Mancini, Rob Mathis, Rashid Puthiyapurayil, Stefan Roggenhofer, David Saunders, and Hyo Yeon for their substantive input.

 

 

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