KEYNOTE
Integrating Design into
Strategic Management
Processes
by Ron Sanchez
A
nalyzing the interface between design and business strategy, Ron Sanchez
identifies the many activities and decision-making points where design
expertise has value. He stresses that design managers must expand their understanding of business priorities and processes, and he proposes that by doing so
they can positively affect the strategic direction of a business unit and build
more-productive relationships with their clients’ senior managers.
Most designers today occupy positions in
their client’s value-creation processes that
are fairly far downstream from their
clients’ strategic decision-making
processes. In typical engagements,
designers are asked to create a good form
or a packaging design for a product
whose functions and target market have
already been decided, or to find good
ways to communicate a corporate image
or message that has already been defined
by senior managers. Growing numbers
of design firms today, however, are realizing the significant potential value that
could be created for both them and their
clients by expanding the role of designrelated activities in upstream strategic
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Design Management Review Fall 2006
Ron Sanchez, Professor of
Management, Copenhagen
Business School, Denmark
decision processes of client firms.
To be considered useful participants
in strategic management processes,
however, designers must meet three
challenges. They must understand clearly the issues that managers consider in
deciding a strategy; they must identify
the ways in which they could most usefully contribute to managers’ strategic
decision processes; and they must learn
how to communicate their potential
contributions using language and concepts that strategic managers understand. The goal of this article is to suggest some important ways in which
design professionals can meet these
challenges.
Integrating Design into Strategic Management Processes
Design and business unit strategy
To explain how designers might connect with
and contribute to strategic management processes at the business unit level,1 we must first answer
the basic question: What is a strategy?
To answer this question, it might be useful to
explain that the field of strategic management is
populated by people from different backgrounds
and with different perspectives on what strategy
is all about. For example, managers, consultants,
and professors involved in strategic management
may come from fields as diverse as finance, marketing, organization behavior, operations management, law, and so on. Moreover, given this
diversity of participants, the field also has a tendency to generate new terms and concepts at a
high rate, often leading not only to debates
about key concepts within the field, but also to
vocabulary proliferation and terminological
confusion. Nevertheless, there is generally a high
level of agreement among managers and other
strategy professionals as to the essential elements
of a business unit strategy, even though individuals may use different terms in referring to these
essential elements and may even attach different
levels of importance to the various elements in a
strategy.
The essential elements of a business unit
strategy are shown in Figure 1 under the strategic
logic of a business unit, the term for a business
unit strategy that my colleague Aime Heene and
I use in our book on strategic management.2 The
term strategic logic suggests there are fundamental logical relationships among elements that
must be defined and maintained in designing an
Resources
effective business unit strategy, and we further
characterize the role of business unit strategic
managers as “designers of organizations as systems for sustainable value creation and
distribution.” To assist business unit managers
in designing effective strategic logics, we also
identify a number of system design principles that
strategic managers should follow when designing business unit strategies.
Our discussion of the ways in which designers can contribute to strategic management
processes at the business unit level focuses on
two key activities:
1. Helping managers define the essential
elements of a strategic logic
2. Helping managers achieve and maintain
conformance to the system design principles that apply to the various elements in a
business unit’s strategic logic
We organize our discussion of these activities
around the three main components of a strategic
logic: the business concept, the organization
concept, and core processes.
1. There are two other levels of strategic management
above the business unit level. Corporate strategy concerns a corporate parent’s “search for synergy” across
multiple business units. Global strategy considers the
additional challenges and opportunities of the search for
synergy in an international context. Space limitations do
not allow discussion of these strategy levels here, but see
Ron Sanchez and Aime Heene, The New Strategic
Management: Organization, Competition, and
Competence (New York: John Wiley & Sons, 2004) for
explanations of these strategy processes.
2. See Sanchez and Heene, op. cit.
Core Processes
Targeted Preferences
Product Creation
Product Realization
Organization
Concept
Organization
Design
Business
Concept
Stakeholder Development
Transformation
Controls and
Incentives
Product
Offer
Key
Activities
Figure 1. The Strategic Logic: Essential Elements of Business Unit Strategy.
(Source: Ron Sanchez and Aime Heene, The New Strategic Management (John Wiley & Sons, 2004)
Design Management Review Fall 2006
11
Leadership Strategies in Design Management
The business concept
In a strategic logic, the business concept represents the market-facing side of a business unit’s
strategy—what we might refer to as management’s theory of value creation. The business
concept defines the basic who, what, and how
questions for a firm: the targeted preferences
(kinds of customers) a firm will try to serve, the
product offer the firm will create for its targeted
customers, and the key activities to be given priority in presenting and delivering its product
offer to its targeted customers.
Targeted preferences. Perhaps the most fundamental decision made by the strategic manager
is where the firm will compete. At the strategic
level, this decision focuses on the choice of market segments the firm will attempt to serve and
compete in. As suggested by the term targeted
preferences, market segments are not defined by
demographics like age,
income, education, or
place of residence, but
rather by the prioritized sensitivities of
potential consumers or
users of a firm’s products with respect to
price, performance,
speed, reliability, quality, and other aspects of
a product offer.
Market segments consist of groupings of
potential customers
who have similar sensitivities with regard to a product category and
who prioritize those sensitivities in similar ways.
The first step in the strategy process for business unit managers is trying to figure out what
kinds of market preferences and segments currently exist and are in the process of forming
within a given product market. Traditional marketing research has developed a suite of techniques (focus groups, expert panels, in-depth
customer surveys, and the like) for trying to discover the kinds of preferences that exist or are
emerging in a product market. Yet these techniques are clearly not adequate to develop all the
possible insights strategic managers need to have
today into how customer (and potential cus-
In a strategic logic,
the business concept
represents the marketfacing side of a business
unit’s strategy—what
we might refer to as
management’s theory
of value creation.
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Design Management Review Fall 2006
tomer) preferences are evolving. Indeed, in many
firms, market segmentation studies typically
focus on quantitative measures of segment size,
growth rates, purchase frequencies, and so forth
in an effort to provide a basis for assessing the
potential profitability of various identified segments. In-depth qualitative insights into the
hearts and minds of potential and actual customers are always in short supply, but are critical
in strategic decision-making.
Designers have skills and methods that can
help strategic managers improve their understanding of the preferences of current and
potential customers. For example, designers
often employ ethnographic and other research
methods based on close observations of and
interactions with potential customers in actual
product-use contexts, but the critical insights
into customer behaviors that can be developed
through such methods are rarely included in
market analyses that strategic managers receive
from marketing research.
Moreover, marketing research is often narrowly focused on investigating how customers
perceive the functions, features, and performance levels that currently define a product concept, and as a result may be blind to important
evolutions in the ways customers perceive and
use different kinds of products. For example,
while most producers of home refrigerators
focused on researching incremental extensions
to existing functions and features in refrigerators, Samsung Corporation asked its designers to
take a close look at how American families actually use refrigerators. After installing time-lapse
video cameras in the kitchens of a number of
American homes, Samsung designers observed
that refrigerators also function as communication centers in American homes, typically holding message boards for family members, shopping and to-do lists, phone numbers, and other
family information. On the basis of these close
observations of refrigerator users, Samsung
decided to introduce flat-panel displays in the
doors of some refrigerator models to support
the important communication function refrigerators have come to play in American homes.
Helping strategic managers understand better
how various kinds of customers actually perceive
and use their firm’s products—and competitors’
Integrating Design into Strategic Management Processes
products—is one of the most important ways in
which designers can assist strategic managers in
selecting the market segments to serve in their
business unit strategies.
Product offer. Once strategic managers have
decided the kinds of customer preferences (market segments) they will try to serve, they must
then decide the product offer that the firm will
create to serve its targeted customers. The product offer (also sometimes referred to as product
offering or value proposition) defines much
more than the product a firm will create. It
defines and interrelates the ways in which a firm
will attempt to create value for its customers,
and the ways in which it will undertake to manage the costs of ownership and use its targeted
customers will incur.
One of the most useful ways of representing
the sources of perceived value and cost in a
firm’s product offer is the net delivered customer
value framework developed by Philip Kotler of
the Kellogg School of Management at
Northwestern University.3 This framework (see
Figure 2) identifies four sources of perceived
value (product use, services, image, and personal
interaction) and four sources of perceived cost
(financial, time, energy, and psychic) that must
be managed in designing a product offer to
appeal to the specific preferences of a targeted
market segment. Designers can provide a number of valuable inputs to help strategic managers
define all eight value and cost dimensions of
successful product offers.
Designers have traditionally been involved in
developing pleasing designs for products whose
functions, features, and performance levels have
already been decided as part of a firm’s strategy.
However, as our discussion of market segmentation suggests, designers could become much
more active in defining the four value dimensions of a product offer farther upstream in a
firm’s strategy process. There is excellent potential for designers to become more involved in
researching the functions, features, and performance levels a new product could provide to its
users, and in helping strategic managers to
understand how different kinds of customers are
likely to perceive value (or not) in various functions, features, and performance levels.
As more and more firms become capable of
Net Delivered Customer Value =
Four Sources of
Perceived Value
minus
Four Sources of
Perceived Cost
1. Product
1. Financial cost
2. Services provided
2. Time cost
3. Image
3. Energy cost
4. Personal interaction
4. Psychic cost
Figure 2. Net Delivered Customer Value framework for representing a firm’s product offer.
offering competitive products today, competitive
strategies increasingly emphasize the services a
firm provides to its customers as important
potential sources of differentiation. Services
include all the activities a
firm performs to help its
customers learn about,
evaluate, decide to purchase, purchase, take delivery of, set up, use, maintain, repair, upgrade, retire,
and recycle a product.
Escalating competition,
not just in products, but
also in the services that
come with products,
means it is increasingly
important for the services
component of a firm’s
product offer to be
designed to deliver services
to customers in a growing
number of ways and at
higher and higher levels of reliability and performance. In today’s experience economy,
designers who improve the design of a firm’s
service activities in ways that increase customer
perceptions of the value of a firm’s services in
support of its products can become important
partners in helping strategic managers effectively
differentiate their firm’s product offers in the
marketplace.
The image value component of net delivered
customer value refers to the value a user of a
Designers have
traditionally been
involved in developing
pleasing designs for
products whose functions, features, and
performance levels
have already been
decided as part of a
firm’s strategy.
3. See Philip Kotler, Marketing Management, 10th edition
(New York: Prentice Hall, 2000).
Design Management Review Fall 2006
13
Leadership Strategies in Design Management
product will derive from the way other people
perceive them when they are observed using a
firm’s product. Luxury goods, for example, are
products that have high image value to people
who buy and display them to signal their membership in (or aspirations for) a high economic
strata of society. However, image value may come
from many kinds of aspirations or affinities that
use of a product might signal. Through direct
observations of and interactions with product
users, designers may be able to help strategic
managers sharpen their
understanding of the image
value users of a firm’s products may derive as they use
the product to signal that they
belong or aspire to some kind
of social status.
The personal interaction
component of net delivered
customer value is the value
that customers derive from
the human interactions they
have in the processes of
becoming and remaining a
customer for a firm’s products. Personal interactions
include not only face-to-face
interactions, but also a firm’s
written communications,
telephone responses, and
websites that a customer may
interact with. All forms of a firm’s interactions
with potential and actual customers today can
be seen as critical in attracting and retaining satisfied, loyal customers—and therefore should be
explicitly designed to create personal interaction
value. Designers who can design service processes (and supporting training programs) that elevate the personal interactions a firm’s customers
experience into strong sources of perceived value
are likely to be seen by strategic managers as
important partners in imagining new ways of
creating value in a firm’s strategies.
The four cost dimensions of net delivered
customer value must also be designed to minimize targeted customers’ perceptions of the costs
involved in taking advantage of a firm’s product
offer. Note that the concept of cost here includes
not just the financial costs of ownership and use
The four cost
dimensions of net
delivered customer
value must also be
designed to minimize targeted customers’ perceptions
of the costs
involved in taking
advantage of a
firm’s product offer.
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Design Management Review Fall 2006
of a product (on which designers may have limited influence), but also the time, energy, and
psychic costs (on which designers may have
major impacts) that targeted customers will perceive as they evaluate what is involved in taking
advantage of a firm’s product offer.
Potential customers for a product are likely to
have different sensitivities to the overall costs of
a product and also to the timing of various costs.
For example, a life-cycle costing perspective suggests that customers will consider not only purchase costs for a product, but also costs of use,
maintenance, repairs, replacement, and retirement. However, some kinds of customers will be
more sensitive to total costs than others, and different kinds of customers will have different
“discount rates” that make them more or less
sensitive to future costs of ownership and use of
a product. By developing insights into how various kinds of customers perceive and weigh these
costs, designers can help managers to design the
cost streams associated with ownership and use
in ways that can be perceived as minimizing perceived costs by targeted market segments.
Time costs represent the time that potential
customers imagine they will have to spend in
evaluating, purchasing, setting up, using, maintaining, repairing, and retiring a firm’s product.
Similarly, energy costs represent the energy that
potential customers imagine they will personally
have to expend in order to take advantage of a
firm’s product offer. While strategic managers
commonly concern themselves with financial
pricing issues, fewer managers have means to
imagine how targeted customers will perceive the
time and energy costs involved in using a firm’s
products. In this regard, designers who can interact more closely with targeted customers to
develop insights into the relative value those customers place on their time and energy in a given
product context can provide strategic inputs to
the design of a firm’s overall product offer.
The fourth form of perceived cost to be managed in designing a product offer is psychic
cost—the extent to which targeted customers
will worry about doing business with a firm.
Potential sources of worry commonly include
concerns about product reliability, durability,
and performance, and the level of services and
support customers will actually receive from a
Integrating Design into Strategic Management Processes
firm. Psychic costs tend to be important (maybe
even more important than financial costs) when
a product plays an important role in a customer’s lifestyle or business. Designers may be
able to help strategic managers to improve their
understanding of the range of concerns that
potential customers have about buying and
using a firm’s products, and of the potential
magnitudes of the various kinds of concerns and
associated psychic costs targeted customers may
perceive.
Key activities. Managing strategically means
setting priorities, and strategic managers must
decide which of the many activities a firm performs should receive top priority in allocating a
firm’s resources (including management attention). From a strategic perspective, the basis for
identifying which activities should be considered
key—and thus should receive top priority in
allocating resources—is straightforward: Those
activities that have the greatest impact on targeted customers’ perceptions of the net delivered
customer value of a firm’s product offers should
receive top priority in a firm’s resource allocations.4 Designers who are able to research and
understand which specific aspects of the eight
dimensions of net delivered customer value really matter most to the kinds of customers a firm
is targeting, can provide critical inputs to the
strategic decision-making processes that determine which activities a firm prioritizes and how
a firm invests its resources in those activities as it
tries to create customer value.
System design principles for the business concept. Designers may provide an important service to strategic managers by helping them to
assure that a firm always honors the two system
design principles for a business concept.
The first system design principle is that the
three elements of a firm’s business concept must
always be logically consistent—that is, the market
preferences a firm is targeting, the product offer
it has created, and the key activities it is emphasizing should be tightly, logically aligned and
make sense together. Achieving and maintaining
logical consistency within the elements of a
business concept is a constant challenge to firms,
because the three elements of a firm’s business
concept are likely to be influenced by different
groups within a firm, each of which may have its
own worldview, priorities, and agendas. For
example, a firm’s marketing staff may take the
lead in identifying and selecting market segments, while its R&D staff have responsibility
for defining and designing product offers, and
operations managers decide how to carry out a
firm’s activities. Designers who can act as devil’s
advocates and discover logical inconsistencies in
a firm’s business concept—for example, key
activities that are driven by a goal of cost reduction when the targeted market segment is more
performance- or speed-sensitive—can help
strategic managers to correct design errors in the
market-facing side of their strategies.
The second system design
principle is that the business
concept must always have a
clear, credible rationale for
superior value creation. In
effect, it is possible to have a
business concept whose elements are internally logically
consistent, but which will
never manage to generate
profits. The key concerns in
this regard are that a business concept not be susceptible to imitation by many
other competitors because competition would
then compete away all economic profits, and
that if a firm’s product offer is one that can be
imitated by other firms, it should have a lower
cost basis than its imitators so that it can operate
profitably at market prices. The key role for
designers in this regard is again that of a devil’s
advocate who can offer objective second opinions about the distinctiveness of a firm’s product
offer relative to competitors’ offers and its relative attractiveness to the kinds of customers the
firm is targeting.
The second system
design principle
is that the business
concept must always
have a clear, credible
rationale for superior
value creation.
The organization concept
The organization concept is the inward-facing
side of a firm’s strategy; it includes the essential
elements of management’s theory of how to
4. The underlying logic for this view is that if a firm does
not succeed in attracting customers because it lacks adequate net delivered customer value in its product offers,
then it will not have to be concerned about other activities because it will not have customers or a business.
Design Management Review Fall 2006
15
Leadership Strategies in Design Management
organize to carry out a business concept effectively. Strategic managers must decide the
resources a firm will use to carry out its business
concept, the organization design it will use to
coordinate its resources, and the controls and
incentives it will use to monitor and motivate its
resources.
The main area in which designers can assist
strategic managers in the organizational domain
is likely to be in the design of the organization
itself. Although strategic
managers are responsible for
the design of their organizations, very few strategic
managers have any training
in design in general or in
organization design in particular. The lack of adequate
attention to and skill in creating organization designs is
evident in the many firms
whose organization designs
really do not work very well
given the strategy the firm is
trying to execute. As a broad
characterization, organizations often lack adequate
communication channels
and processes for coordinating the work of different
groups in a firm. An important area in which designers
can be seen as valuable partners in strategic decisions is helping managers to
identify and remedy the missing links in a firm’s
organizational designs and processes.
Accomplishing this means, for example, that
designers should be able to help managers to
create communications that are not just attractive in appearance, but that also convey the right
message to the right people at the right time.
Although firms
engage in many
activities and processes, at a fundamental
level there are four
core processes that all
organizations must
carry out—product
creation, product realization, stakeholder
development, and
transformations.
Core processes
Although firms engage in many activities and
processes, at a fundamental level there are four
core processes that all organizations must carry
out—product creation, product realization, stakeholder development, and transformations. There
are some important ways in which designers can
help strategic managers improve their firm’s per-
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Design Management Review Fall 2006
formance in all four core processes.
Product creation. Helping firms to create new
products has always been the key area of designer involvement with firms. However, as suggested in our discussion of the ways designers can
become more strategically involved in defining a
firm’s business concept, there are many opportunities for designers to become more active participants in researching and selecting market
segments and defining product offers that are
upstream from traditional design functions.
Moreover, many firms today are interested in
improving their own design and development
processes so that design firms with effective
approaches to creating new products may be
able to offer consulting services to firms willing
to rethink how they approach product creation.
Product realization. Product realization is the
current management term for all the activities a
firm performs in producing, shipping, delivering, and supporting its products. Today many
firms are trying to implement platform strategies5 that will give them the flexibility to configure and deliver new product variations quickly
as markets change. Platform strategies require
co-development of a firm’s products and its
processes for realizing its products. Managers
who are interested in platform strategies are
looking for help from designers versed in modular design methodologies who can help them to
define the various process capabilities needed to
support high rates of product configuration and
change.
Stakeholder development and transformative
processes. Stakeholder development is the process
of developing the skills and capabilities of the
people and firms who provide resources to a
firm’s value creation process. Transformative
processes are periodic transformations that
change the way people in a firm think and act—
for example, the implementation of total quality
management or the adoption of significant
social responsibility goals. Both of these core
processes require well-designed communications. Stakeholder development can occur only
when a firm’s stakeholders are adequately
5. See Ron Sanchez, “Creating modular platforms for
strategic flexibility,” Design Management Review,
vol. 15, no. 1 (2004), pp. 58-67.
Integrating Design into Strategic Management Processes
informed about improvement opportunities and
sufficiently motivated to take advantage of them.
To be successful, transformative processes must
be communicated internally and externally in
ways that make a firm’s commitment to a fundamental change in the way it works credible and
convincing. In both these processes, designers
who can help managers improve their communications to their stakeholders may be seen as
valuable partners in helping to design and lead
strategic development and change processes in
their organizations.
Conclusion
This discussion has tried to suggest some important areas in which designers might expand their
professional activities in interacting with strategic managers of business units. Some final comments on how managers behave in making
strategic decisions may suggest how designers
might initiate these activities.
It is important to remember that the field of
strategic management really has no orthodoxy of
concepts and terminology, and therefore all
strategic managers do not use the same vocabulary in talking about strategic issues. However, all
strategic managers trying to do their jobs well
will have to address the essential questions identified above, and most firms will go through a
corporate “languaging” process of creating a
vocabulary for discussing its strategic issues. An
essential first step for designers in interacting
with strategic managers is to learn the vocabulary and concepts the managers use to define
and discuss their strategic issues. The essential
elements of strategy discussed here can alert
designers to the kinds of concerns their clients
will be thinking about, and to the concepts and
terms they are likely to be using to talk about
those concerns.
A second important thing to remember is
that all humans—including strategic managers—have heuristics and biases in the way they
think. Frankly, given the complexity of strategic
decision-making in even moderate-sized firms
today, the job of strategic managers is intellectually overwhelming. In such circumstances, those
managers do what we all do in our own lives and
situations—focus on the few variables we think
we understand and can exert some control over.
An important way for designers to get the attention of top managers is to let them know they
can help to assess some of the softer, more elusive, qualitative elements in designing a strategy,
especially those related to what potential customers are really looking for and value most in a
product category.
Finally, it is essential to understand that most
senior managers are not used to the language
designers use. Moreover, because most senior
managers inhabit a world in which quantitative
and financial analyses of tangible factors ultimately rule the day, many feel uncomfortable
with the value system founded on esthetics that
many designers share and with the traditional
message from designers about the importance of
“good design.” Designers who want to connect
with strategic managers must not only learn the
vocabulary of strategic management, they must
also express clearly what they can do to help
their clients in the terms that matter to their
clients—that is, communicating specific ways in
which they can help strategic managers define
and implement more successful strategies in
their businesses.
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