Business Thinking for Designers02
Explore business concepts
Essential vocabulary, models, and strategiesListen to Chapter
by Ryan Rumsey
About six months after joining Apple, I moved from a team focused on internal training to one responsible for customer-support programs. When I joined the new team, I struggled to convince my peers in Program Management that dedicated time for research was an important part of the design process.
As I reflect on that experience, I realize I simply lacked the language to get others on board with my ideas. I was speaking design, but my colleagues were speaking business. I didn’t take the time to get to know their unique needs and objectives before I made suggestions on how I could improve things. To help you avoid my mistakes, here are some essential concepts you can introduce to your vocabulary to help you align better with your colleagues.
As with learning any language, vocabulary is important. Here, we’ll review the terms and concepts you’ll need to communicate effectively with leaders across the business. Chances are, you already have a loose understanding of what these mean. But let’s nail them down.
- Competitive advantage: A condition or circumstance that puts an organization in a superior business position relative to competitors. For example, Apple uses design as a competitive advantage. Geico uses low prices.
- Profit:The difference between the cost of making or buying something, and the price at which it’s sold.
- Profit margin: The amount of profit a company keeps relative to the sale price. Typically referred to as high or low, companies use profit margin to determine whether they need to sell a lot or a little of something to achieve income targets. Apple earns high profit margins on their iPhones, so they don’t have to sell a lot of them to make money. The fact that they do sell a lot is a major reason why they have over $200 billion in cash. Geico has low profit margins on their policies. So they have to sell a lot of policies to make a meaningful amount of profit.
- Trade-offs: Decisions companies make to reduce something in return for increasing something else. A common trade-off is the good-fast-cheap scenario, in which you can only have two of the three characteristics. For example, you must choose between quality (good) and speed (fast).
- Supply and demand: The inverse relationship between the quantity of products or services a market can provide and the desire for them. Companies can affect demand by controlling supply. For example, diamonds, believe it or not, are not rare. They’ve been made rare in the marketplace by supplying less than what is available. This has helped create increased demand over the last 80 years.
- Market forces: Pressures that change the supply and demand of products in a free market. These include the threat of new competitors or substitute products, the bargaining power of customers or suppliers, and the amount of competition a company faces.
That wasn’t so difficult, right? Most of us already know more about business than we may think. Now let’s take it up a level.
A business model is an outline of how a company intends to create and capture value. It describes what will be valuable to customers, how that value will be produced and delivered, and why it will generate revenue for the company. This outline is not only a foundation upon which business decisions are made, it’s also an effective description of the values designers are expected to help provide, so it’s important to understand the model you’re working in.
Selling products online—a.k.a. e-commerce—is a popular model in the digital world. They typically fall into one of three categories with matching acronyms. B2C businesses sell directly “2” Consumers. B2B indicates selling to other Businesses. And B2G is when you sell to Governments. In recent years, there’s also been the addition of C2C, in which consumers sell to one another via platforms like eBay or Indiegogo.
Within these e-commerce categories, business models vary significantly, as entrepreneurs have adapted successful offline models to work online. Examples include:
- Freemium: Giving a product or service away for free, then charging later when customers need additional features or services to get the most use out of the product. Examples include Mailchimp, Slack, or Skype.
- Marketplace: A platform where a fee or percentage of a sale is taken in without managing the inventory being exchanged in the sale. Airbnb and Etsy are e-commerce marketplaces that could be compared to a farmer’s market or flea market in the physical world.
- Subscription: In exchange for a regular fee, customers have ongoing access to a product or service. Think Netflix, Spotify, Orangetheory, or your local paper.
- Disintermediation (a.k.a. cutting out the middleman): Selling directly to customers by forgoing retail partners. This allows a manufacturer to lower costs and own the full relationship with the customer. Successful examples include Casper, Warby Parker, and Dell.
- Franchising: A company licenses the use of its business model, brand, and the rights to sell its products or services. McDonald’s, Allstate, and H&R Block are all franchises.
- Low Touch: Selling products and services with minimal interaction between the company and the customer. IKEA and EasyJet do this. So does SurveyMonkey.
- Razor Blade: A low profit-margin product that requires high-cost or high-regularity companion products. Disposable razor blades, ink-jet printers, and the Amazon Kindle all use this model.
- Reverse Razor Blade: A high profit-margin product that comes with low-cost companions products. The Apple iPhone is an example that enables access to loads of low-cost music, movies, and TV.
- Advertising: Rather than selling directly to consumers, businesses sell access to an audience to promote or sell products, services, or ideas. This is what Google does, as well as network television and radio.
As you might imagine, some companies have multiple business models at the same time. Apple is incorporating reverse razor blade, e-commerce, and subscription models across their portfolio, all at once.
While a business model describes how an organization creates and captures value, business strategies are how an organization aims to do those things better than competitors. There are typically several viable business models within a market, which means it’s ultimately the strategies that will lead to success or failure.
To gain a competitive advantage, there are three generic strategies companies use:
- Become a cost leader
- Create differentiation
- Target a niche customer base
These generic strategies were popularized by Michael Porter in his 1985 book, Competitive Advantage: Creating and Sustaining Superior Performance.
Let’s look at how two companies in the same industry use similar models, but have vastly different strategies to gain a competitive advantage. Dell and Apple both use the disintermediation model to provide direct-to-consumer computer products. Dell chose the cost-leadership strategy, providing affordable, customized computers quickly through a well-oiled supply chain.
In the same market, Apple uses differentiation by focusing on premium, easy-to-use products with high-quality purchasing experiences, world-class design, and integrated products and services.
While the strategies for Dell and Apple are fundamentally different, both companies arrive at their strategies by answering two basic questions:
- Where does the company play? – Which customers, territories, and channels (e.g., box stores, online, phone, etc.) will the company target?
- How does the company win? – What will the company do to create a competitive advantage for itself?
When Dell and Apple determined their respective strategies, they chose different types of customers, channels, and methods to win their share of the market. The answers to these two strategic questions also inform whether a company or product is focused on growth or profit.
- Growth focus: When a business aims to gain market share or diversify the products or services it offers, sometimes at the expense of short-term profits.
- Profit focus: When a business aims to maintain profits over reinvesting in the production of new products.
The job of those “at the table” is to know how to make decisions that support the strategic focus. Are you pushing to create new products at a time when your company is focused on profits? If so, you’re out of step with the organization. Are you showing how accessibility improvements can help gain market share for your startup? If so, you’ll likely have an easier time gaining support. Take a few minutes now to consider whether or not your approach to design is in line with your company’s current business focus.
In Chapter 3, we’ll review several ways to quickly determine where your company plays, what and how the company aims to win, and the strategic focus they pursue.
Growth vs. Profit
As a designer, the strategy your company chooses to gain a competitive advantage is important to your work. Of equal importance is whether your company is focused on growth or profit. Generally speaking, startups are focused on growth in hopes of finding revenue models later, while established companies tend to be focused on profit while keeping an eye out for new growth opportunities.
Perspectives of company health
To understand what strategies work, business leaders create a variety of objectives, measures, and targets for products and teams. To evaluate the overall health of a company, these objectives, measures, and targets are set across multiple perspectives, with each one focusing on a different aspect of the company.
While these aspects can vary from company to company, many approach overall health using four basic perspectives:
- Financial – This is the traditional and cumulative view of company success. It looks at the monetary results of past decisions.
- Customer – This perspective focuses on the people who buy a company’s products and the value provided to them.
- Operational – Efficiency is the focus of this perspective, as well as how smoothly processes and teams are running.
- Learning & growth – This perspective is all about employees. What are the key skills to be developed, the core processes needed to create products and services, and the cultural environment necessary for success?
Companies with long-term, viable business models prioritize these perspectives effectively to create value for internal and external stakeholders. In doing so, they also define their company cultures.
As designers become more aware of how objectives, measures, and targets relate to the prioritization of these perspectives, we can better evaluate the impacts of our solutions on the business. We are also better equipped to evaluate the culture of the organization itself.
In Chapter 4, we’ll dive deeper into these perspectives and how they are prioritized and measured.
Value-based decision making
Businesses survive when they create value for customers. Businesses thrive when they create more value for customers than their competitors.
There’s an idea inside many organizations that in order to create business value and make business decisions, you have to go to business school. But the reality is, not all value is created by the techniques taught in business school.
Here’s an example you likely won’t find in business school curriculum: Did you know that for the health of a child with a fever, parents have to keep track of which medication was used last? This simple task can create undue stress for parents during a time when stress levels are already high. There would be tremendous emotional value in relieving this stress.
While financial concerns often inform business decisions, subjective factors should also play an important role in decision-making. Intangible aspects like ethics, morals, or emotions need to influence decisions on everything from project roadmaps to branding. Designers are uniquely qualified to advocate for these values.
To distinguish the effects of these different types of values, let’s define them as “actual” or “perceived.”
- Actual value: When math is used, actual values are in play. These are the numbers used to calculate the costs to make something, the prices at which products are purchased, the salaries of employees, the hours needed to develop a tool, etc. When EA decided to invest in new software for customer support agents in 2011, the costs of licensing and maintaining that software came into play. While actual values are relatively simple to calculate, not all companies make trade-off decisions using math.
- Perceived value: While difficult to calculate, perceived values have equal, if not more, importance than actual values. When customers or executives use terms like excellence, simple to use, or beautiful, these are all examples of perceived values. These values are less sticky and require a lot of clarification to understand. I’ve worked with plenty of stakeholders over the years who wanted to “just design it like Apple does” because they think it’s the most beautiful.
Combined, these two categories reflect how customers and businesses expect to receive total value from products or services. Historically, designers focused primarily on perceived value. However, our business partners need us to focus on actual value as well.
My friend Kara DeFrias shared an example of combined focus on the Hacking the Red Circle podcast. While at Intuit, she pitched an internal TEDx event for employees. Though she was focused on providing a world-class experience, to secure the necessary funding from her leadership team, she connected the event to the core values of the company and created a worksheet to track each minute of the event to keep costs under control. This approach worked and in turn, created a one-of-a-kind event for the company called TEDxIntuit.
Including a quantifiable discipline can help us better anticipate the outcomes of our work on perceived values. This is important because every company has different levels of maturity for measuring value. Poor measurement means well-intentioned people can make decisions that negatively impact the business. An important aspect of our job is to increase the maturity around us and that starts by having a stronger aptitude for measuring value. I’ll cover this more in Chapter 4, but know that when we measure our work, customers, employees, partners, and other stakeholders can better understand the benefits of the design approach.
The job of those “at the table” is to know how to create enough value for customers and actual value for the business to survive or thrive—and to make decisions that satisfy both. When the conversation at the table changes to actual value, designers often don’t have much to say. It separates us from other functions. But we can fix that.
My attitudes about design changed as I began to understand basic business concepts. I knew how design impacted the lives of customers, but I suddenly began to see how it affects the ability of business partners to make decisions as well. I realized that addressing only one perspective of value made it more difficult to gain consensus on my recommendations.
By learning basic models and strategies, designers can incorporate the language of business into their analysis and recommendations. Then, by communicating the actual and perceived value design brings to the business, you’ll find more support for your work and ideas.