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1: How Discovery Takes Shape

Martin opens with the shopworn anecdote of McDonald's restaurant, which began as a diner for travelers. The original restaurant opened in San Bernardino in 1940 as a "burger and barbecue" drive-up that served quick and simple means to people who were on the road and didn't have time for traditional restaurant service.

The explosion of automobile ownership after WW2 put a lot more people on the road, and family drives were common. This caused a sharp increase in their business - and they got more than they could handle. Their restaurant was piled up with teenagers, and they struggled to serve up to 125 carloads at a time.

The new business ran off their old customers - families giving mom a night off from the kitchen or stopping for a bite while taking a day-trip didn't like the boisterous crowds. And the service bogged down, as their small kitchen couldn't push out orders fast enough, meaning a long wait for service and complaints from customers.

The brothers developed a "Speedee Service System" by optimizing: they cut the menu down to 25 items, eliminating things that took too long to cook, and made the products standard (a hamburger came with ketchup, mustard, onions, and pickles - not the long list of options), replaced carhops with a self-service counter, and bought equipment such as a five-at-a-time milkshake machine that was much faster than using a blender. This was highly successful, and the brothers opened four more restaurants using the same system.

In 1955, Ray Kroc (who had sold them the milkshake machines) bought out the brothers. He recognized their success, but saw opportunities to optimize the production-line approach to food service - and more significantly, he saw that there was a great demand for this kind of restaurant from coast to coast.

Using the principles of scientific management, Kroc analyzed the operation, documenting and optimizing various processes: from how long to cook a hamburger to how to hire people and manage a store. As an example of his efficiency: he had hamburger potties stamped from a machine rather than patted out by hand, so that they were all exactly 1.6 ounces and the same thickness - so they could be cooked in exactly 38 seconds to a consistent internal temperature. This kind of precision, standardization, and attention to detail was applied to everything.

The author presents this model because it's central to the thesis of his book: Ray Kroc was not a great entrepreneur - he did not start a restaurant, but bought one that was already quite successful. He was however a great manager, who created a high level of efficiency and enabled a small business to explode into a worldwide phenomenon.

(EN: It should be noted, that Kroc gave very little attention to the needs and desires of the customers - he did not ignore them, but they were a distant second to operational efficiency. At the time he created his chain, the "silent generation" of Americans were willing to tolerate standardized products and kowtow to the demands of those who served them - the customer was not king, but a beggar who had better keep his mouth shut and accept what was on offer. That has changed much, and some firms fail to recognize this - and strive for efficiency of operation at the cost of customer service, and fail as a result. In the present day, people would see "corporate" taking over a family-owned business, degrading both product and service. It might succeed, as Starbucks has done the same in recent history, but customers are less willing to accept mediocrity and compromises. So while efficiency remains important, it is no longer the driving force of business in the present age, so it should be undertaken with much caution.)

Seeking Reconciliation

More than a century after Frederick Taylor's scientific approach to management was introduced, we are still in the process of reconciling it against the previous school of management, which holds that gut-feel and instinct were the basis for business decisions. In spite of the triumphs of scientific management, the latter remains the manner in which most businesses are operated.

It is not that scientific management has never been heard of - it is taught, briefly, in many business schools. But the moment an individual rises to a position of power and authority, his ego takes over and he feels that he can dispense with the work of analysis and theory and run the operation by his own whims without exercising much intelligence at all.

It is also fair to say that innovation and optimization are diametrically opposed to one another: optimization simply finds a more efficient way of doing what is already being done - keep doing what you're doing, but do it faster - while innovation defines a whole new way of doing things, throwing out the old and replacing it with something entirely dissimilar.

But neither innovation nor optimization alone is sufficient. Optimizing a business has its theoretical limits: things can only be done so quickly, and when the best and fastest method of doing something has been discovered through a process of analysis, the business can go no further. At that point, innovation becomes necessary to take the business to the next level.

Consider the opening narrative about McDonald's restaurants: the McDonald brothers worked as hard as they could at making their drive-up burger and barbecue restaurant successful, but they came to the realization that they would have to change the way they did business in order to succeed. They didn't simply hire more cooks, open a second kitchen, or take other measures to do more of the same - they redesigned the business to do things differently. When Ray Kroc came along, the innovative phase was over, and he took on the task of optimization.

(EN: And to the point of "maximum efficiency" it can now be seen that there are many fast-food chains that all operate with the same basic level of efficiency, and it is no longer a competitive advantage. What is needed in the restaurant industry is innovation - but no-one seems to have found the way to take it to the next level.)

And so, rather than battling between innovation and optimization, we must reconcile thee two modes of thought. Both have the ability to contribute tremendous value to a business - and whether one or the other is the best course depends on the idiosyncrasies of a specific business and its specific market.

The author offers up the term "design thinking" as if it is his own invention. (EN: It's a buzz-word that is defined different ways by different people.) He describes it vaguely, and offers up equally vague claims about its potential to do wondrous things for business.

If there is any enemy of progress, it is not one or the other of these approaches, but the gut-feel school of management and the business-as-usual attitude. These approaches undermine success and poison any attempt to improve a business, and they simply have to be eliminated if any manner of progress is to be made.

Sidebar: Hunches, Heuristics, and Algorithms

A quick consideration of these three practices:

A "hunch" is a gut feeling that an individual cannot explain. The author calls them "pre-linguistic intuitions" to reflect the fact that they are not necessarily baseless, merely that the human mind is capable of perceiving and conceiving ideas that cannot easily be put into words. When a person has a hunch, they have an idea they are struggling to articulate. Of importance: it may be a sound idea, but the difficulty is in describing it.

A "heuristic" is a prompt for thinking, it suggests a principle or asks a question that leads to the formation and articulation of ideas. Heuristics can be useful methods of discovery (what do customers need when they buy an X?) or they can be used to draw out a hunch and turn nonverbal intuition into language by which it can be articulated and communicated to others.

An "algorithm" quantifies and existing or imagined process. It is a model that is largely mathematical and quantifies things: how long does it take to cook a 1.6 ounce hamburger patty to 155 degrees on a 400-degree griddle? How many patties can one cook prepare on a 2x3 griddle in an hour? Those algorithms define the numbers by which action can be managed.

(EN: And as usual, I will emphasize that algorithms tend to ignore things that are not quantifiable. They are very good at looking at manufacturing, where actions can be measured and observed, but terrible when applied to marketing, where things cannot be observed and behavior is driven by qualitative measures that are pointedly ignored.)

A Problem Leads to a Question

The process of discovery begins with a question: we recognize that something happened, or wish that something might, and seek to understand the cause.

Beginning with a question rather that a supposition leads us to investigate and observe - and the key to discovery is finding the right question to ask, and being very observant through a process of reasoning that identifies the root cause.

Discovery also requires examining not just the object but its environment, to consider all the things that might have caused the outcome and pare away those which are erroneous and identify those which are salient.

So in this sense, an observed (or imagined) phenomenon gives rise to many questions, and a process of elimination leads to the right question, the answer to which will identify opportunity to take action to achieve a desired outcome - to stop something undesirable from happening, or to cause something desirable to happen.

A Question Leads to an Answer

Once the right question is identified, investigation takes place to discover the answer. This is also a trial-and-error process in which many possible explanations are hypothesized and considered until the correct answer is discovered.

(EN: What the author does not stress quite enough for my liking is that the investigative process must be objective and open. Too often, people jump on the first plausible answer and spin into action without due consideration. This leads to failure or partial success - which will lead them to go back to the drawing board and start over. It is both more efficient and effective to spend time brainstorming multiple answers ... but this is not often the behavior that is witnessed.)

An Answer Leads to an Algorithm

The answer to the question is of limited value unless it can produce an algorithm. A few examples:

As such, the discovery of a principle is only the beginning of discovery, and yields little useful knowledge - but the development of an accurate algorithm yields knowledge that is useful in planning action, and which can often be applied to a wide array of situations and needs.

Martin mentions pop music as an example: the "one-hit wonder" is a band that stumbled upon a principle - an arrangement of pitches and rhythms - that engage the emotions of an audience. But because they do not fully understand the reason it works, they are unable to achieve sustained success. Other bands seem to turn out one hit after another over a long period of time - and he posits that they have found an algorithm that is successful, and because they understand the reason their music works they have the ability to do it over and over.

At the same time, bands don't remain popular forever (they often step away from the algorithm that worked to experiment with one that is unproven) and not every song they perform becomes a hit single (because algorithms do not guarantee success). And because music is entertainment, it is subject to the wiles of fashion (the environment of "consumer tastes" changes and a successful algorithm does not work under all conditions).

He mentions Brian Eno specifically, who experimented with the sound of the human heart and recognized that songs with a synthesized heartbeat as their rhythm track tend to be instinctively enjoyed by listeners. He has applied this algorithm to a variety of genres of music and has produced successful albums for many bands over the past four decades. Even so, Eno doesn't have it quite right, as not every act he produces succeeds, so it's fair to say that the algorithm is imprecise and the exact formula for consistent success in music has not yet been discovered.

Back to McDonald's

Martin returns to McDonald's as an example of the process he just described.

This shows the tremendous power of algorithms: the McDonald's brothers could have built an enormous fast-food empire had they been successful at defining the algorithm that would make their restaurant a major success.

The Creation of Value in Business

Value in business is created by examining the environment to identify problems and opportunities, then supposing what might be done to eliminate problems and capitalizing on opportunities.

(EN: This calls to mind the problems of poorly-executed SWOT analyses, which cause firms to list their strengths and weaknesses and define opportunities and threats accordingly, as opposed to identifying the opportunities and threats and then considering strengths and weaknesses in light of them. A company can develop a strength in response to an opportunity, but it cannot create an opportunity because of its strength.)

In the McDonald's example, witnessing the sudden growth in the volume of business led to the supposition that travellers wanted a quick meal with no frills (as opposed to the slower and more flexible diner service the restaurant offered previously).

It was not necessary to do extensive research to develop a broad understanding of social trends: while it happened to be true that the increase of the income of the middle class made cars more affordable and more people were taking day-trips, all the McDonald brothers needed to observe was that their restaurant was suddenly piled up with customers.

(EN: broader knowledge is not necessary, but highly advisable. There should be some consideration of whether a trend going to be sustained, or is merely a temporary increase, to determine whether an adjustment or permanent change is needed. Many costly mistakes are made building a business based on a superficial observation without further consideration.)

And per his earlier point about pop music, being right once leads to small and short-lived success of the one-hit wonder, but it is better to explore the supposition further to discover an algorithm that can be repeated, sustained, and even transferred.

Ray Kroc made a success of McDonald's by belaboring the algorithms: not merely making service faster, but discovering how to select a location for a new restaurant, how to hire and train staff, how to manage the supply chain, and various other elements of business.

Getting the algorithm right is a key to competitive advantage - and getting it right first often creates a sustainable advantage. Competitors who imitate you will always be a step behind you, and you will have already won the market and built your brand.

Balancing Optimization and Innovation

For a single business plan, innovation (discovering the new) and optimization (improving the old) are steps that follow one after another. But businesses seldom execute on a single project at a time, but instead undertake multiple initiatives all at once. This calls for a balance between innovation and optimization.

An organization that focuses exclusively on innovation is not sustainable. Each new idea has a high risk and a high chance of failure, and the cost of failure will surpass the profit of success. New ideas often have a period of settling in before they become profitable - so even if an idea has the potential to be successful, it will be abandoned for the next idea before it returns sufficient profit. This is the reason 90% of start-ups fail in their first two years.

But neither is focusing exclusively on optimizing a sustainable approach. Optimization has a theoretical maximum, and once a process is fully optimal it will be making as much profit for as little cost as possible, and it can improve no further. This would be all good and well if it weren't for competition and progress: the firm that optimized a wagon-wheel factory to its maximum would perish when cars replaced wagons.

Martin suggests that "a vast majority" of successful businesses follow this common path: a company is created through an innovative product idea, then optimizes that idea to produce the maximum profit, then declines when the market no longer demands the product they are good at making.

The strategy for many firms is diversity. They enter into multiple lines of business so that when one dies, the others will continue - which is to say that they accept that products will "die" and simply replace them with new ones, rather than innovating to keep pace with the desires of the market. There are "pure" firms that focus on one product and maintain their competitive edge through innovation - but they are far more rare.

Failure to Innovate

Firms that are strong and profitable suffer from inertia. The best short-term return on investment is to keep doing the one thing they are good at, which has a "guaranteed" return or in any case less risk than changing to try something different and unproven. They may see the opportunity to be innovative, but feel it is not in their short-term financial interest.

(EN: I've worked with firms stuck in this cycle of myopia: do a lot of R&D and planning for things that they end up never doing. They are interested in discovering new ideas, but not in funding their implementation, and usually end up having to catch up to a competitor who discovered the same thing and acted more quickly.)

This creates opportunities for new firms to enter the market. Consider how McDonald's focus on optimization created many opportunities for other firms:

McDonald's missed the opportunity to become the dominating firm in the quick-service restaurant category by ignoring these changes in the market, and insisting on focusing on optimizing the production of products that fewer and fewer customers wanted.

(EN: While MCD has regained profitability and market share, consider the era from the late 1990s through about 2002, when the stock price fell by 2/3 and the future of the firm was in serious doubt. Also, consider the income of their competitors as revenue lost to them.)

Since its plummet, McDonald's has taken some steps to regain its footing, but offering a wider range of options (they don't offer fried chicken, but a fried chicken sandwich) as well as healthier choices, and being more open to special requests. But it has never won back the customers it lost during its period of myopic optimization and likely never will. Everyone admires an innovator, and holds a "me too" imitator in disdain. Particularly when a once-strong firm stoops to imitate its rivals, it is a confession of inferiority.

Martin briefly mentions Proctor and Gamble as a firm that has survived for decades through diversity. P&G was a detergent manufacturer, who branched out into household cleaning products, who branched out into diapers. Because it was innovative and took risks, it now dominates a number of product categories rather than being stuck in a single one, waiting to be outmaneuvered by its competition.

(EN: This greatly understates their diversity: P&G makes detergent, household cleaners, soap, shampoo, disposable razors, tissues, tampons, paper towels, toilet paper, medicine, perfume, cosmetics, deodorant, batteries, toothbrushes, denture paste, mouthwash, air fresheners, and other products - and most of the leading brands in the non-food aisles of any supermarket belong to P&G.)

Design Thinking and the Design of Business

Most businesses are steadfastly focused on their present operations. Except in times of crisis, very few evaluate their effectiveness and ponder methods of improving their operations but instead remain focused on efficiency.

Martin speculates that this is simply a matter of complacency: the present way of doing business seems to work well enough, and unless there are strong signs that it is faltering there seems to be no need to take on the effort and risk of doing things differently.

He also notes that business schools that train managers are focused more on analysis (which looks to the past and present) and teach very little about strategy (which looks to a possible future). Analysis depends on "hard facts" that can be gathered from the past, and cannot handle speculation about a possible future that cannot be seen or measured. As such, most of the people who run businesses are trained in analysis, and it is more comfortable for them.

The goal of the analytical manager is not necessarily to prevent innovation - but to protect their business from the risk of speculation. However, the latter results in the former.

A better approach to either is to develop a method of thinking that considers both the past and the future rather than sacrificing one for the other. That is, a manager must analyze the as-is state of a business (which they already do, ad nauseum) as a benchmark against which any proposed changes must be made. (EN: At the same time, they must develop a method of reasonable speculation that is based on plausible logic.)

The future offers no testimony. The data that can be used to project what might happen is not based on anything that has already happened - or at best, it is not as perfectly correlated as historical evidence. It may be logical, and it may be plausible, but it is not proven ... and it cannot be validated until it is put into practice (which, by definition, it has not yet been).

To project a future, the "design thinker" must use logical methods to show plausibility based on assumptions - and to be forthright about the assumptions upon which his projection is based. It must not be merely daydreaming of what might happen, but finding evidence that shows the plausibility of assumptions.

Envisioning the future requires a combination of creativity and logic, and even the most detailed projection will require a leap of faith.

A Different Kind of Organization

Not only does innovation require a different kind of thinking, but it also requires a different way of organizing work.

Efficiency demands that procedures be established, to get everyone to do the same tasks in the same ways so that they can be measured and monitored. Individual employees have permanent tasks, so the organization has permanent groupings of people. The task of management is to ensure conformity to the existing ways of doing business, and any change must be carefully planned, communicated, and managed.

Innovation demands that capabilities and resources be available as needed to do a new task in a new way. Individual employees must be ready to do what is necessary, which has not been defined yet, and they must be able to assemble themselves as needed. Procedures and policies place constraints that prevent them from doing so, and instead of making sure people do what they are currently doing, management must ensure that people have skills that are not presently needed and the willingness to do what is not presently being done.

In such an environment, change does not need to be directed or compelled. It simply happens when people apply themselves to doing something differently in order to achieve a desired outcome.

A Different Kind of Leader

If doing things differently requires a different attitude and a different organization, it follows that innovation requires a different breed of leadership.

However, this must start with the board of directors, who must provide the latitude for design thinking and provide financial rewards not for staying the course but for taking risks and trying new things.

(EN: This is likely the reason that small companies or those run by their founder are more innovative - because the person who owns the business has a financial interest in the rewards of innovation, and starting the business was a speculative and risky venture. When it passes from his hands to those of others, the vision and the ambition are lost and they seek to protect what they have rather than achieve what they haven't.)

From here, Martin mentions some of the legendary CEOs who built or reengineered major organizations - in each instance it is a leader who has a vision to achieve, rather than the desire to maintain.

Conversely, one can look at the CEOs who merely maintained operations that were developed before them. They do not generally win fame in the media because what they do is not particularly interesting. In economic downturns and times of crisis they are recognized for staving off disaster, but they do not accomplish anything particularly noteworthy and tend to be passive and taciturn types.

A Different You

The author speaks to the reader, a "you" whom he presumes to be a person who has passion for ideas but feels smothered in a company that is stuck in a rut. This is likely, as people who do not want to innovate or change are highly unlikely to pick up a book like this one.

The advice to such a reader is to develop discipline - far too many "innovative" types are simply daydreamers who have visions that are not substantiated or particularly well articulated. As such, their input is often dismissed as being of little value.

To develop a compelling idea means presenting it in a plausible manner, with sound logic and plausible predictions of the possible future, and to present it with as much detail and granularity as one might describe something that currently exists.

With these skills it should be possible to "win over" others in the organization and gain the support necessary to at least experiment with innovation - to win a few battles and develop the credibility that will lead the reluctant detractors to consider proposals for further change - and to spread the appetite for innovation across an organizations.

(EN: It is optimistic to generalize that many firms wish to innovate but simply do not know how, but pessimistic to assume that they are impervious to change. But as a frustrated innovator, my sense is that a person who plans to undertake the journey should first consider how far he is willing to go and how much effort he is willing to put in - and define a stopping point where success is unlikely. No amount of enthusiasm and willpower will produce gold in a coal mine - and it should always be considered that you may be working in the wrong place.)

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