McKinsey says design-driven firms see increased revenues, shareholder returns

In conjunction with the launch of its new McKinsey Design business (formed from a number of design agency acquisitions), the MBB strategy firm released a world-first study quantifying the financial value of design to business. The study found that companies excelling in design witness increased revenues and shareholder returns double the rate of industry peers.

Good product designs – like the aluminum-chassis MacBook, Swiss Army Knife, or Canada Goose jacket – can drive sustained commercial success for companies, and essentially set the market and inspire countless knockoffs. Think of how many PC ‘zenbooks’ aspire to replicate the MacBook design, and the endless flood of cheap knockoff multitools and fur-ruffed parkas with circular logo shoulder patches.

Only the best designs in products and services, like the above, stand out from the rest and stand the test of time. Seeking to quantify the financial benefits that design can have for businesses, consulting firm McKinsey & Company studied 300 publicly listed-company across multiple countries in the consumer goods, retail banking, and medical device industries.

The rigorous study gave each company a single metric – the McKinsey Design Index (MDI) score – for their design performance, based on hundreds of design actions taken over five years. The companies in the top quartile of the MDI saw annual revenue growth of 10% compared to 3%-6% for other companies. Meanwhile, top-quartile MDI firms saw annual growth in total returns to shareholders of 21%, while industry peers saw 12%-16%.McKinsey’s report relates that over a five-year period, top design-focused firms saw 32% higher revenue growth and 56% higher shareholder return growth compared to industry peers.

Critically, the research found that revenue growth and shareholder returns between companies in the fourth, third, and second quartile were marginal. As such, markets disproportionately rewarded the firms whose design performance was at the top of the heap.

“This isn't a linear game, and it’s not a case where one extra dollar spent on design leads to one extra dollar of revenue,” commented McKinsey Design partner Benedict Sheppard. “It is a case of disproportionate rewards. If you think about this from a user perspective, no one gets very excited about a product that went from being the 32nd to the 31st best. But everyone's talking about the top two or three products."

Furthermore, the strong performance of top-quartile design-thinking firms relative to their peers was consistent across the three industries: consumer goods, retail banking, and medical devices. The results, seen in the graph below, show that companies with excellent design capabilities have better financial performance whether they are making physical products, services, experiences, or apps. It is, however, apparent that the product-heavy medical devices and consumer goods categories see greater gains from design leadership than the services-focused retail banking category.McKinsey further dug into the 2 million pieces of financial data and 110,000 design actions to figure out which specific actions correlated most highly with improved financial performance. In the end, they came away with four clusters:

• “More than a feeling”: embeds design analysis in the boardroom and C-Suite. The top performing firms saw design as a top-management issue, assessing its performance with the same rigor as revenues or costs. Lower-performing firms stuck design issues in middle management.
• “More than a product”: puts the customer experience front and center. Top-quartile firms emphasize user-centricity, mapping the customer journey and gathering solid customer insights. Breaking down barriers between physical, digital, and service design further helps create a better, holistic experience.
• “More than a department”: ensures design is every employee’s responsibility, not isolated to the design department. Rather than siloing, companies need to integrate designers with other functions (marketing, engineering, etc.) Top-quartile integrators in consumer packaged goods saw CAGR 7% higher than the weakest integrators.
• “More than a phase”: emphasizes design-driven iteration, testing, and learning. The odds of creating a breakthrough product or service are greater in environments that continuously encourage learning, testing, and iterating with users – generating broad and reliable consumer input.

McKinsey notes that it is important for companies to be successful in all four sets of actions to see the requisite financial benefit.

“If you are the CEO of a company it's relatively easy to point out examples of individual products or services that have led to extraordinary value creation,” added Sheppard. “However it is notoriously difficult for companies to launch consistently great products and services time after time. The findings in this research show there are four sets of design actions that leaders can take to maximize their organization’s chances of designing products and services that delight customers, stand out from the crowd, and drive growth.”