I recently sat down with my BlackBerry voice recorder and Mats Lederhausen to ask him to share his philosophy of "purpose bigger than product." Mats is a great entrepreneur and also had one of the most successful careers at McDonald's where he was a driving force for its turnaround. He currently runs his private investment vehicle Be-Cause and is a Special Partner at our firm, Cue Ball.

What is your philosophy of "purpose bigger than product" all about?

At its core, it is about being real and idea-driven. Trust is perhaps the most important currency in business, and big ideas may be the only true source of competitive advantage. Lack of trust is a form of tax. And that tax rate has increased in the past number of years. Customers simply don't trust institutions as much today. Particularly large businesses. The main reason is that we now live in an "information everywhere" and more transparent world. Every customer has a camera in their cell phone, a Facebook in their pocket and Twitter at their fingertips. This means we hear and see evidence of businesses not walking their talk. Their products don't match their promise. In order to regain this trust you must simply make sure that all your products, your merchandising, your advertising, your people and the totality of your touch points with consumers sing from the same hymn. And that hymn is what I call purpose. Some people call it vision. Others call it focus. It is the same thing. It is source of your promise. It answers the question: Why are you here?

Talk a little more on the notion of "big ideas."

I often talk about "altitude creates attitude". When you meet people that have a big idea it is almost impossible to be unaffected. It is like a perfume. You can smell it miles away. I firmly believe that the source of human energy and creativity can be found in the distance between where we are and where we'd like to be. It is that creative dissonance that is the entrepreneurial rocket fuel. If human beings could have walked everywhere on the planet I don't believe we would have invented trains, planes and automobiles. So, if you really want to build great companies you need big ideas.

Certainly, not all big ideas may be viable in all incarnations. What about the reality of these ideas?

Of course they have to be believable. They can't be pipedreams. Or as John Naisbitt once said: You can't get so far ahead of the parade that no one knows you're in it.

From an execution perspective, you have to think big, start small, and scale fast. You can't think big and start big, that's almost impossible. You need miniature versions of your grand idea so you can validate its parts, and then iterate and tweak constantly. There's nothing wrong with having a really big idea and launching only aspects of that idea. Rome wasn't built in a day. Take Chipotle, for example. Steve Ells had a very big idea about food, but he didn't start by executing 100% of his vision; he gradually did what he could towards that theme.

It is also important to remember that your purpose is not what you "tell" customers, but what you do. The best way to disappoint everyone is to over-promise and under-deliver. Therefore you must be humble AND committed at the same time. In fact, customers are more forgiving when you make mistakes if those mistakes are honest efforts in trying to improve towards a known and worthwhile direction.

How can a purpose be instrumental in leading an organization?

I look at purpose as the guiding star. The compass. The soul. Steve Jobs once said "Design is the fundamental soul of a man-made creation". And everything we do is design in one form or the other. And if you have a fuzzy idea of your own soul, your design will suffer. On the other hand, like Steve Jobs does, if you have a sharp idea of your soul and what footprints you want to leave, all your design will complement and reinforce that soul of yours.

How did you come to have this philosophy?

There are a few parts of the answer. First, to be honest, it's hard to know the answers to the bigger questions in life, like why we believe what we believe. To a certain extent it's the result of the sum of all of our experiences since birth. Second, I've been influenced by seeing what really works. I think strong conviction and a sense of purpose enables focus, and the biggest culprit of bad performance in a company is lack of focus. It's hard to set direction if you don't know who you are. Thirdly, I've decided that I only want to work with companies that are trying to do something important. It's about human progress and adding value to society.

What do mean when you say "important?"

While we have significant global issues to be concerned about, an important business doesn't have to be grandiose or socially driven in order to be important. General contribution to the well-being of another human being is worthwhile. It could be a restaurant that's creating jobs and leaving customers just a tad bit happier than when they arrived. Or a concept such as MiniLuxe, our Cue Ball investment that is trying to "Starbuck" the nail salon, which has innovated a lot around hygiene and customer experience. It is an example of a business with a clear purpose that is trying to do something remarkably better than the industry norm.

What companies really celebrate this philosophy?

Nike is a company that understands it. They have always had this idea that it's more than a sneaker. They are about getting into the game, being more than a spectator in life, and embracing activity. In their words, "Just do it." If you go to their headquarters in Oregon, it's like being in a gym: it breathes "active lifestyle." That's what they're about and they have consistently executed around it.

Southwest Airlines is about giving people the freedom to fly. They are about seeking and loving freedom, and they enjoy being a bit nutty about celebrating that notion. And there are many others as well. Apple, Berkshire Hathaway, Microsoft, Google, Patagonia, IKEA, and a host of others. There is one thing that is interesting to me to note about all these companies. They are very different in so many ways. But they are also very similar in one way. They all have their founders alive and kicking. When the source of the original idea is still around it is harder to lose why you came to this world in the first place.

Most "how-to" guides for company blogging focus on marketing and PR objectives: positioning your organization as a thought leader, or using it as a "free" channel to get company news out there. We have a blog like this at our RISD, but we also have another, behind-the-firewall blog that is used for management, not marketing.

The blog covers vast territory, from the intellectual to the mundane. Most fundamentally, though, it is a place to have an ongoing conversation about the thing we all share — RISD — in ways that don't necessarily come up in the course of a normal workday. Anyone with a RISD ID — students, faculty, and staff — can join the discussion; we can comment to posts and announcements, request that a topic be initiated, and even (on Tuesdays) comment anonymously. None of the comments are moderated before they are posted, though all are "community policed" with the following rules:

Mom's Guideline: Please refrain from swearing and other behavior that might make your mother (or father, or guardian) disappointed in you.

Vegas Guideline: What happens in two.risd, stays in two.risd.

Catchup Guideline: Start from the very beginning of the posts/comments to best acclimate yourself before posting.

Lawyer's Guideline: Everything posted on two.risd needs to comply with the law.

More than a year into this experiment, several of its lessons are now apparent:

1. The medium has meaning. Compared with many companies — where it's not uncommon to use email to ask a casual question of someone down the hall — RISD has a highly non-digital culture. Today, wariness still abounds at the idea of sharing honest opinions in a digital forum — never mind one moderated by the President. It reminds me of a good conversation I had with Gentry Underwood, who heads IDEO's Knowledge Sharing practice, about how any internal communication vehicle must be designed to be culturally sensitive — the most advanced isn't necessarily the best, especially when trying to get people to open up. At this point the blog is like any other social media — it has few participants compared with the many who are onlookers to the dialogue.
2. Get ready for the water cooler to be on display. For the leaders of an organization, the blog provides us instant feedback on management decisions and direction. Some of the whispers of private conversations and reactions are brought out into the open for all to see. Because the feedback channel is instant and visible, it keeps the community's reaction to decisions present in the minds of decision-makers. "What will happen on the blog?" becomes meeting shorthand for "What will the reaction be?"

When it was first launched, much of managers' anxiety about this new communication channel focused on the blog's unmoderated nature — the fact that anyone in the community can post without passing through a filter. But after more than a year, even in a culture that doesn't shy away from conflict, we can count on one hand the number of inappropriate comments that have violated our rules and needed to be pulled down. Controversial, pointed, and opinionated? Often. But actually breaking the "rules?" Rarely. It seems we learn over and over with new communication channels that human behavior is strikingly constant. People who misbehave are the exception rather than the rule, no matter the medium.

3. Adding dimensions to working relationships. The blog has added dimensions to my relationships with colleagues, revealing opinions that may not otherwise have a forum to come out. In some cases, people are much more outspoken on the blog than they are "in life."

This has also happened on an institutional level. For managers, the questions arise on the blog make it clear where there is clarity and where clarity is lacking. Usually the blog can't create clarity on complex management decisions, but it does serve as a catalyst for further offline explanation, either in conversation or in a more formal setting, like a campus-wide meeting. Conversely, often the contents of a campus-wide meeting are posted on the blog for further discussion. The on and offline worlds complement each other to get the word out to a diverse community, and to make it understood.

4. Communication hierarchies are flattened. Unlike the traditional management chain, the blog offers open and equal access to people in all parts of our organization. Because those who are most vocal on the blog may not be those in positions of authority, the perspective of the overall conversation looks different than communication that happens through the usual channels. It is more multifaceted, bringing the widely varying experience of students, faculty, and staff directly into the conversation, and exposing their different vantage points. Yet it is imperative to the make the distinction between communication hierarchies (which are flattened) and actual decision-making powers (which remain intact). In order for the blog to work, the premise that it is for providing input — and not making decisions — has to be made fundamentally clear.

We're curious how others' experiments with management-by-blogging have gone. What does your organization do?

There is a vital lesson buried in the August 19, 2009 Jet Blue announcement that they were suspending sales of the $599.00 "All You Can Jet" promotion they'd debuted only seven days before. Any student of Behavioral Economics could have predicted that an "all you can eat" approach would inspire vastly different behavior than if Jet Blue had charged a lower fixed fee plus $1 per mile. Similarly, over a decade ago when AOL switched to a usage-independent flat price, connection time increased four times more than they anticipated.

"All you can eat" is an entirely different price than "very, very cheap."

Traditional economics says that lowering the marginal price from $2 to $1 should have a similar effect to lowering it from $1 to $0 — but experience and experiments have both shown that the traditional demand curve acts in an odd manner when we reach $0 marginal cost. Jet Blue's executives should have known better. But the Jet Blue management team is not alone.

Many executives assume their customers are more rational than they really are. For example, most leaders believe in enhancing the options given to customers, but increased choice can actually freeze decision-making by overwhelming the shopper. Excessive options is a key reason that an average of 60% of all online shoppers abandon their purchases mid-stream.

Behavioral Economics is the study of how people really think as opposed to how we think they think. To some of us, who were never fully convinced by the hyper-rational assumptions of neo-classical economics, it is a welcome return to reality. Yet, many firms have such a deep case of rationality-itis that they continue to treat their customers as if they were designed by Adam Smith. In working with Dan Ariely, we've begun to apply a set of ideas from Behavioral Economics in real world settings, around four distinct areas: framing, aversion, social context and timing — what we call FAST decision-making designs — and their impact can be significant. Our aim is to make the choice process easier for the customer.

In their famous recommendation engine, Amazon combines framing and social context, which gives the shopper an easy way to traverse millions of possible selections. In our work with clients we have found that it's possible to increase choice to a higher value and higher-priced product by as much as 10 or 20% by framing the option that is contextualized to them (e.g., "Someone like you also bought this other book.") This is consistent with Amazon's belief that their recommendation engine increases the average purchase by 20%.

In our world of information overload, every new choice is an effort — so companies need to give as much thought to the process of choice as to those choices and options themselves. For instance, Dan noticed that the Economist, at one time, showed three options for their potential subscribers: online-only for $59.00, print-only for $125.00, or online and print for $125.00. He designed an experiment, using his students, in which 84% chose the $125.00 for print and online, 0% chose print-only, and only 16% chose online-only. Any rational manager would say the $125.00 offer print-only offer was useless. But when Dan removed the $125.00 print-only offer, 68% of people bought the online product for $59.00 while only 32% shelled out for the $125.00 bundle! In other words, the higher-priced option was chosen less than half as often. By having the decoy of $125.00 for print-only, the customer could make an easy comparison to the other $125.00 offer in which they got online for "free." Even something as simple as choosing a magazine has enough complexity in it that a decoy choice can radically change buyer behavior.

If Jet Blue had understood the implications of Behavioral Economics, they may have raised the price on their offer — but despite the data that shows the power of designing the decision process, few companies trust Behavioral Economics because stands in the face of much of the economic logic executives were taught in school.

Every manager should remember that in a world of excess choice, an easy place to differentiate is in the careful design of the decision process itself. It is especially powerful in the ever-increasing realm of e-commerce. Few companies have optimized their customer choice process to make the most of the web. Fewer still do regular experiments to find out how their customers really act instead of how they are supposed to act, and they are leaving money on the table because of it. So ask yourself: is your company's choice process optimal — and do you have data to prove it?