Understanding the Economic Value of Design v1

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Design has long struggled to justify its value as a business activity, and while it has gained ground it is still losing too often. Designers know it is the primary source of innovation, problem solving, and is one of the few truly sustainable competitive advantages.

What designers don't realize is that most business activities are either belief or superstition, rather than based on a reliable return on investment (ROI) calculation. Business people and designers lack a shared understanding of how design creates value, and so they use their specialized language to defend their position, and ultimately reduce the competitiveness of the business.

This is a work in progress on that issue, by Chris Finlay and Jason Gaikowski, focused on creating a critical chain of logic to help both business people and designers understand how to create value together.

Understanding the Economic Value of Design v1

  1. 1. Economic Value of Design Chris Finlay & Jason Gaikowski
  2. 2. AKA How do you get more resources to do your job & deliver more success?
  3. 3. The long struggle of Design has been to justify its value. Design has been lacking a kind of science that supports its value and impact on business performance. Our goal is to create a strong chain of logic that empowers designers & design advocates to succeed in business conversations about the value of design.
  4. 4. Business say they want creativity & innovation. Design delivers both, yet is regarded more like art than science.
  5. 5. Why are some business activities mandatory when others are discretionary?
  6. 6. Inputs of most business activities are too complex to accurately predict their returns yet design is held to a different standard.
  7. 7. For example: What is the roi of accounting?
  8. 8. How does HR impact shareholder returns?
  9. 9. Why is investment in design discretionary when HR & accounting are not?
  10. 10. Business activities are based on regulation, convention, or superstition until they have undeniable proof.
  11. 11. Or a champion has enough credibility to get investment.
  12. 12. Business too often misses the fact that design drives business activities.
  13. 13. “That design is the ultimate expression of strategy.” Majid Iqbal, Design Codes
  14. 14. Tesla Roadster Ford Focus
  15. 15. Both electric cars
  16. 16. Two different strategies.
  17. 17. Two different designs.
  18. 18. Two different experiences.
  19. 19. If the market teaches us anything about consumer brands it’s that the best experiences win.
  20. 20. Designing the experience is a new strategy for winning.
  21. 21. “86 percent of consumers will pay up to 25% more for a better customer experience.” Survey conducted by RightNow and Harris Interactive 2011
  22. 22. When we design for experience we design the invisible connections between, people, places, goals, feelings, meaning, and value.
  23. 23. Because people do things to feel stuff.
  24. 24. Past business -> product / service -> marketing -> customer
  25. 25. Past business -> product / service -> marketing -> customer Today business -> experience design -> product / service -> marketing -> customer People Business Technology
  26. 26. Design is strategy fused with a problem solving methodology that helps companies know why, how, and what to make in order to help people feel how they want to feel.
  27. 27. Design is very new as a management discipline.
  28. 28. Design is where brand was 20 years ago.
  29. 29. Like brand development, creative problems solvers (designers) know it is a critical business activity.
  30. 30. A sustainable competitive advantage.
  31. 31. Time for us to prove it to the bean counters.
  32. 32. Design orchestrates interactions across business functions. Every interaction is an experience that leads to more (or less) value.
  33. 33. Value = f(Expectation, Experience*) * Social, Emotional, Functional
  34. 34. Value = Reality - Anticipation
  35. 35. Value of experience Who How Economic Business Earnings velocity Emotional User Fulfills emotional need Social User & Business Status for both Functional User Utility
  36. 36. The value of these experiences accrue to the brand and then flow to sales and future sales Expectations Future Sales Potential Emotional Experience Functional Experience Brand Asset Actual Sales
  37. 37. For most companies, the brand is the single most valuable thing they own.
  38. 38. Investments in designing brand experiences drive performance in established business metrics. Near term Sales margin loyalty share of wallet customer acquisition at lower cost marketing roi product development product lifecycle returns/warranty brand asset Long term cost of capital (borrowing, ratings, analyst reports)
  39. 39. Designing great brand experiences pay dividends in good times Firms that continue to increase investments enjoy returns 400% versus firms that cut investment levels 40% Revenue Returns Expenditure Increases 30% 4x 20% 10% Expenditure Reductions 0% Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Based on Natalie Mizik and Robert Jacobson “Marketing Strategies Across Economic Conditions” Columbia University Working Paper, 2009. Recessionary times are determined using the Chicago Fed National Activity Index (CFNAI). Sample period 1989-2005 Changes in operating income are based on unanticipated earnings. Operating Income is measured relative to Assets Expenditures includes Marketing, R&D, and Corporate costs (=[SG&A-R&D]/Assets|. Relative returns are risk adjusted stock returns.
  40. 40. Even in bad times, it makes sense to invest for the future Investing is also the best strategy for firms with net operating loss enjoy returns 200% versus firms that cut investment levels 0% Revenue Returns Expenditure Increases -10% 2x -20% -30% Expenditure Reductions -40% Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Based on Natalie Mizik and Robert Jacobson “Marketing Strategies Across Economic Conditions” Columbia University Working Paper, 2009. Recessionary times are determined using the Chicago Fed National Activity Index (CFNAI). Sample period 1989-2005 Changes in operating income are based on unanticipated earnings. Operating Income is measured relative to Assets Expenditures includes Marketing, R&D, and Corporate costs (=[SG&A-R&D]/Assets|. Relative returns are risk adjusted stock returns.
  41. 41. The experience of the brand supports or hinders the company’s market performance.
  42. 42. Market valuation of experience design is signaled by acquisition price of experience led companies.
  43. 43. And the talent that has shown it can create those experiences. There is a new word for that, “acquihire” = Acquisition + Hire
  44. 44. Instagram acquired for ~$1 billion Snapchat rejects $3 billion offer Mailbox acquired for $100 million Nest acquired for $3.2 billion
  45. 45. Instagram, Snapchat, Mailbox No new hardware No new software They designed an experience
  46. 46. Idea x Experience Design x Brand = Economic Value
  47. 47. The business case is clear.
  48. 48. For customers, the experience is the business.
  49. 49. But business people are not designers and designers are not business people.
  50. 50. So the biggest barrier to experience design is shared understanding of how value is created.
  51. 51. Fortunately, this is no longer about belief, we have evidence of impact.
  52. 52. You now have evidence. So...
  53. 53. Don’t fear the ROI question Learn to speak the language of business Connect the dots for finance, marketing, & IT Create a coalition and movement Create passion & commitment Find & use the vocabulary business needs to do what we know works
  54. 54. Deep valuation of design will require longitudinal measurements, we need to embed a mindset of experimentation in the projects we work on and follow up on performance. We need to design analytics attached to business metrics in our work & share the results with each other.
  55. 55. Remember & be confident that experience design deserves to be embraced as a management discipline.
  56. 56. That you, a designer, can drive the business outcomes that the company needs, investment in you is justified in economic terms.
  57. 57. Repeat after us: Design delivers desirable experiences Experiences lead to better or worse customer relationships The quality of customer relationships is recognized in the market as brand asset valuation Brand value = shareholder value What creates value to shareholders gets invested in
  58. 58. The science we need Design Investment in activities Experiences Stock Value Brand Asset Customer Relationships Economic Value Brand
  59. 59. Agree? Disagree? What else?
  60. 60. @chrisfinlay / chrisfinlay.com @JasonGaikowski

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