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leadership advice

Roger Martin is dean of the Rotman School of Management.

Roger Martin is dean of the Rotman School of Management at the University of Toronto. BusinessWeek named him one of seven "Innovation Gurus" in 2005 and two years later one of the 10 most influential business professors in the world. In this interview, he explains how to make the creative leaps that will help you to be more successful in your strategy and decision making, and how we can respond to the agitation for changes to the capitalist system.

At the core of what you have been teaching and writing about is thinking – integrative thinking. What is integrative thinking and why is it important?

It is important because it's a form of thinking that highly successful leaders employ. I conducted about five years of research and found when highly-successful leaders face what appears to be two opposing models or directions they could choose, instead of picking one at the expense of the other – even though it seems the options are so opposed the leaders can't adopt both – they figure out a creative resolution of the tensions and indeed design a brand new model that contains elements of each but is superior to both.

Here's a quick example: Issy Sharp, founder of Four Seasons, first built a roadside motel, 125 rooms, low budget – very simple. Then he built the 1,600-room Four Seasons-Sheraton in downtown Toronto. Those were the two models for hotels: Either build big-city convention hotels or small budget motels. Instead of going for one or the other, he decided to create a new model, the medium-sized hotel with the intimacy of the small motel but the amenities of a large hotel, supported by a fantastic form of service that travellers would pay a premium for. So we wouldn't hear of Issy Sharp and Four Seasons would be nothing special if instead of choosing he had not come up with a better answer. That's integrative thinking.

We're told in strategy that we are supposed to make a choice. If you don't make a choice, it's not a strategy.

That's true. People often ask me about that, since my background is in strategy, and they wonder if I believe you don't have to make choices. I say, "No, it's the kind of choice that you're making." Issy Sharp still made a choice. His choice ended up with a hotel chain of 100 hotels, not 1,200 hotels like a Westin, for example.

It was very, very choiceful. But it wasn't the choice he was presented.

Often people who listen to the strategy-is-about-choice advice assume that they should pick amongst the options that are presented to them – that arise out of the current environment. No, they should choose what solves the problem and creates the solution they are looking for.

So how do we get an opposable mind?

First, you need that approach as a goal. You need what I call "a stance" – this is my job, not to pick between two options presented to me but to come up with the best solution.

It also helps to recognize that things people tend to call reality are not reality – they are just models. Often individuals will say, "the reality is," or "the truth of the matter is." That's because they think the truth is what they are suggesting customers want – the truth is that there are only two ways to build a hotel chain, for example. You need to reject that, realizing the alleged truth is just somebody's interpretation, and it's your job to create something new.

There are a set of tools to grow your integrative thinking capability. I noticed integrative thinkers were willing to absorb a little more complexity, paying attention to more things that were salient to their decision making. What was salient to Issy Sharp's decision making that wasn't to others was that people staying in luxury hotel chains weren't terribly happy to be there. Everyone assumed because they were in the lap of luxury, they were delighted to be there. But they were busy people who travelled too much and would rather be at home or in the office. So rather than giving them more luxury or more obsequious service, he figured maybe he could make the hotel room more like home with shampoo in the showers, a bathrobe in the closet, a hair dryer in the bathroom, and 24-hour room service. He could make it more like the office with two-line telephones, working desks and secretarial service. Those changes only came about because Issy Sharp saw things to be salient that others didn't notice.

Integrative thinkers also are willing to contemplate more complicated, causal relationships. So rather than a simple A causes B thinking, they think about complex causal relationships. They also make sure they are keeping close attention to the whole while working on individual parts of the puzzle, rather than chopping problems down into little pieces and trying to reassemble them, which is unfortunately what the modern corporation tends to do. Marketing takes the marketing part, and manufacturing takes the manufacturing part, and so on. It's broken into 10 pieces, which rarely results in an integrative operation.

A manifestation of that is at Four Seasons, a hotel chain that charges a massive price premium for exemplary service, where you would think the second most important person would be the executive vice-president for guest services. It's not. And the reason I can definitively say it's not is because that position does not exist – there is no guest services department. The corny but true reason is service is everybody's job.

Finally, when facing a choice, integrative thinkers are willing to keep working on the problem to see if they can come up with a better solution.

That is how integrative thinkers work, and at the Rotman school we are demonstrating this is totally teachable to MBAs and at other levels of education. We're involved in a pilot project with the Toronto District School Board to bring integrative thinking – a version of it we call I-Think – to secondary school students. Thus far it is working spectacularly. They can learn this type of thinking at that level; you don't need to be in graduate education.

You delved into design thinking, which has now become very popular, in The Design of Business. You highlighted the difference between analytical and abductive thinking. Could you discuss that?

This is a follow-up to the opposable mind and integrative thinking because we need to know how leaders come up with these creative resolutions. What is the creative act? As I explored this issue, it became clear to me that companies were getting in their own way on innovation by a subtle barrier in the way they thought. The business world has become much more quantitative and analytical technique-based in recent years.

Before I can explain why analysis can be a handicap for innovation, however, I need to delve further into how analysis comes about. There are two forms of logic that underlie analytical thought, deductive and inductive logic. Deductive means there is a rule that has been handed down from the past, like the times tables: 7x6=42. So if you ever see 43 as the answer to 7x6, you can say it's not true.

The other form of logic underlying analysis is inductive, where instead of using a general rule, you look at many instances to form a conclusion. Market research is inductive logic. You survey 1,000 people and, on the basis of what they say, declare that people like a broad product line rather than a narrow product line or prefer blue to orange for your logo.

The difficulty is that, implicit in those two forms of logic, is they try to prove what is true based entirely on the past – on a rule handed down from the past or on observations that have a basis in the past. But you cannot prove from past data whether any new thing in the world – any new idea or innovation – will work.

Inadvertently, as managers have become more analytical and more quantitative, they have been inclined when someone puts forth with a new idea to respond, "Prove it in order for me to go forward." That's what a good manager does these days – he or she is analytical and asks for proof. But since you can't prove a new idea in advance, all the new ideas are viewed as dangerous and problematic because they aren't provable.

Companies have to recognize a different form of logic exists to handle new ideas. It's abductive logic, which was the insight of a turn-of-the-20th-century American pragmatist philosopher named Charles Sanders Peirce. When you are facing something that doesn't obey the previous rules or have some data but not enough to be inductive, you make an inference to the best explanation of what is going on, or what he calls a logical leap of the mind to come up with a new idea, and that new idea can only be proven to be right or valid by the unfolding of time and future events. So design thinking to me is the form of thinking that combines both inductive and deductive logic with abductive logic to create that which is new. It requires companies to drop the notion that they can prove new ideas in advance through analysis.

That is scary for companies.

It is. And the reason it is scary is because of the education of this generation of managers. They have been educated to believe that the prudent thing to do, the wise thing to do, the stable thing to do, the correct thing to do, is to be analytical. They think they are being sloppy managers if they don't.

Analysis is useful for honing and refining what we have already but will never get us to leap to something genuinely new and different.

There are lots of people out on the streets calling for a change to the capitalist system. You wrote the book Fixing the Game this year on that issue. What do you recommend?

We have a capitalist system that is dragged around like a bull with a nose ring on it by the expectations market – the stock market. The price of a stock is the collective expectation of people playing in the stock market of what will happen to the company in the future. It's divorced from the real market, which is what companies actually do to produce real products and make a buck this year. We know there is a difference between the two as the S&P 500 over the course of its history has traded at about 16 times current earnings, which means 15 times earnings are all about future expectations.

With the coming of stock-based compensation – executives compensated on the basis of the performance of the stock market price – we have executives working more on shaping expectations than on actual performance. They hype their stock on Wall Street, concoct a series of mergers they shouldn't, or opt for sharp if not illegal accounting and out-and-out fraud – to goose expectations rather than build real companies. That has created the last two bubbles and crashes. We went over 70 years from the third-last crash in 1929 to the second-last crash in 2001, but only seven years to the 2008 crash; they were both exacerbated by stock-based compensation and this extreme focus on the expectations market.

It will be hard to change but I think it's doable. We need boards to recognize that stock-based compensation does not align the interest of shareholders and management. It disaligns their interest and it's bad for companies. We have to make sure that hedge funds can't make gobs of money and pay significantly lower taxes than the rest of us, because hedge funds create no value – they simply shuffle value around and are bad for the economy. We have to get pension funds to stop feeding these hedge funds by forbidding pension funds from investing with managers who charge both an asset management fee, 2 per cent of the assets, plus a performance fee, 20 per cent of the upside, because that is completely disaligned with the interests of pensioners and is extremely dangerous, making our markets more volatile.

I think the angst and anguish about the economy these days is not misplaced. There is a realization that the expectations market is wrecking the lives, jobs, homes and mortgages of real people for no utility to society as a whole.

Who do you turn to for reading, wisdom and learning on management?

The greatest thought leader in the history of business is Peter Drucker. Rereading Peter Drucker is almost better than reading anybody else. I am also a former close colleague of Mike Porter and have done lots of work with him; I think he is super-insightful and intelligent. He has written the best stuff on health care and country competiveness, so I pay attention to him. I have become a huge fan of Dan Pink. His books A Whole New Mind and Drive are terrific.

This interview has been condensed and edited.