Today, competition can seemingly come from any geography or sector, and customer loyalty can dissolve in a click. Given this rapidly changing landscape, smart corporate leaders are increasingly looking to design as a crucial source of differentiation.
What exactly do we mean when we talk about “design?” Well, much like “analytics” and “big data,” design is a term that suffers from misuse. Design is not just about making objects pretty. Design is the process of deeply understanding customer/user needs and then creating a product or service—physical, digital, or both—to meet these needs.
To understand the design challenges facing business leaders today, my colleagues and I conducted research into the design actions and financial performances of 300 publicly listed companies, over a five-year period. Our 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 later in this article 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
The Business Value of Design
Our research found a correlation between design best practices and financial performance— those companies scoring in the top quarter of MDI respondents increased revenues and shareholder returns at nearly twice the rate of their industry peers on an annual basis. Over a five-year period, this resulted in 32 percentage points higher revenue growth and 56 percentage points higher shareholder return growth compared with industry peers.
The good news for CEOs? Companies from a wide variety of industries consistently showed financial benefits from good design: from retail banking to medical devices to consumer goods. This suggests that improving your design capability can improve your company’s financial performance whether you are making physical products, digital apps, services, experiences or a combination.
What’s the catch? The relationship between design and financial performance was not linear. An extra dollar spent on design doesn’t always get you an extra dollar in revenues. Additionally, this is a game of disproportionate rewards for the top quartile – shareholder return and revenue growth differences between the fourth, third, and second quartile MDI scorers were marginal. The market disproportionately rewarded top quartile companies whose design performance truly stood out from the competition. In other words, if you are going to improve the design capability of your organization, do it properly, or don’t do it at all.
The Four Design Actions Leaders Can Take
Out of the 100,000+ design actions uncovered during our research, we were able to identify four themes that showed the greatest correlation with improved financial performance. Sadly, being good at one or two isn’t enough. The companies that outperformed their industry peers in terms of revenue growth and shareholder return were strong across all four dimensions.
- First, at the top of the organization, adopt an analytical approach to design by measuring and leading your company’s performance in this area with the same rigour the company devotes to revenues and costs. One online gaming company we know discovered that a 5% increase in user satisfaction on its homepage equated to a dramatic 25% increase in sales. Moreover, it also discovered that improving satisfaction beyond that first 5% had almost zero additional impact on sales, saving further effort that would have brought little additional reward.
- Second, put the user experience front and center in your company’s culture by softening internal boundaries (between physical products, services, and digital interactions, for example) that don’t exist for customers. The best-performing companies in our research start with the user, not the spec, and design a seamless physical, service and digital user experience. They do not fear to integrate with third-party products and services in cases where it is what the users want.
- Third, nurture your top design people and empower them in cross-functional teams that take collective accountability for improving the user experience while retaining the functional connections of their members. For one global furniture maker, moving designers from a siloed design center into cross-functional design teams led to a 10% reduction in time to market, and a 30% improvement in product revenues. The power of engineers, designers, marketers and finance working as one team simply resulted in more user-centric and commercially feasible products.
- Finally, you should continuously listen, test, and iterate with end-users. Gather and incorporate user insights from a combination of qualitative and quantitative techniques from the first idea until long after the final launch.
How to Get Started: The First Step Towards Better Design
If you are serious about taking the lead, our advice would be to choose one important upcoming product or service design to pilot improvements on. This approach is consistently more successful than a company-wide “design culture” transformation, which can be hard to show real impact.
One medical-equipment group we know rallied around the design of a new surgical machine as it sought to head off a growing threat from competitors. The commitment of the CEO and senior executives were intense; executive bonuses were tied to the product’s usability metrics and surgeon-satisfaction scores. Cross-functional and co-located teams carried out more than 200 user tests over two years, from the earliest concepts to the detailed design of features. In all, more than 110 concepts and prototypes were created and iterated. The final design’s usability score—a measure of customer satisfaction—exceeded 90%, compared with less than 76% for the machines of its two main competitors. The ultimate solution combined a physical device, a digital data pad that could seamlessly connect with more than 40 third-party operating-theatre devices, and a service contract.
In the past six months, the company’s market share has jumped 40%, in part as investors understand the upcoming user-centric products and services that set the company apart from its competition and—even more important—that will improve patients’ lives.
For the first time, this research provides quantifiable evidence to substantiate the hypothesis that has historically been difficult to prove. Now we know that companies with the best design practices increased revenues and shareholder returns at nearly twice the rate of their industry peers on an annual basis. This allows for a more objective, fact-based management discussion on the importance of design investments within your organization. It also provides a framework that CEOs can use to guide their next steps to improve business performance.
We see a tidal change taking place in the industry. Design is now considered to be a real business issue. Senior decision makers need to act now, or they will be left behind.
This article is based on the report, The Business Value of Design, which includes a self-assessment version of the McKinsey Design Index. Both are available at http://mckinsey.com/valueofdesign
Hugo Sarrazin is a Senior Partner at McKinsey & Company and the global leader of McKinsey Design and McKinsey Digital Labs. He is based in Silicon Valley, California.