When Thomas Watson Jr. told Wharton students in 1973 that good design is good business, the idea seemed quixotic, silly even. To many people, design still meant the superficial polish of nicer homes and cleaner graphics. But Watson had earned the right to his beliefs. The recently retired IBM CEO was a business oracle, having grown the company tenfold during his tenure by transforming its signature product line from cash registers to computer mainframes. Along the way, the perception of IBM had changed irrevocably. Once rooted in the grime of cogs and springs, Big Blue had become the face of a new computer age.

Watson had always been a pioneering advocate for design, going back to 1954 when he recruited Eliot Noyes to reinvent the street-level showroom at IBM's Manhattan headquarters. And as IBM transformed, it became synonymous with the rise of modernism. Watson and Noyes commissioned Paul Rand to create its logo; Mies van der Rohe and Eero Saarinen to build its offices and factories; and Charles and Ray Eames to craft its legendary 1964 World's Fair exhibit. But from our current distance we can see the cracks in Watson's logic: Logos and buildings, nice as they were, weren't central to how IBM actually made money–not compared with the engineers who were figuring out how to build ever more powerful mainframes. Back then, design was marketing by another name. The design and business symbiosis that Watson was advocating at the time was more prophecy than reality.

Only now, 19 years after his death in 1993, is Watson being proved right. Innovation today is inextricably linked with design–and design has become a decisive advantage in countless industries, not to mention a crucial tool to ward off commoditization. Companies singing the design gospel range from Comcast to Pinterest to Starbucks. You will see dozens of them in the pages that follow. But why now? What makes this moment different?

Apple's rise offers a few important lessons about today's connection between design and business. The easiest is that design allows you to stoke consumer lust–and demand higher prices as a result. Whirlpool's VP of design, Pat Schiavone, recently told me, "We're changing from being a manufacturing-based company to being a product company. It's not just about cost cutting." Schiavone was hired three years ago from Ford, where he most famously rebooted the Mustang's design. "Why change? Because good design is very profitable."

That shouldn't be a surprise to anyone who owns a $600 iPhone, but Apple's model suggests some harder-to-digest lessons. One is the value of thinking of product systems rather than solely products. An instructive example comes from Frog, the design consultancy that fashioned the case for the legendary Apple IIc. Today, one of its marquee clients is GE. You might wonder what design can possibly have to do with the success of a jet engine or an MRI machine. But hospitals and power plants are now linking their machines into ecosystems. And well-designed iPad apps are the simplest way to manage them. "If we don't do it, someone else will," says Greg Petroff, general manager of user experience and design at GE. For the company, the threat is that if someone else designs those linkages, "GE could be relegated to not having the top relationship with the customer," Petroff says. "Our hypothesis is that we can build a better solution."

Designers are the ones best situated to figure out how a kit of parts can become something more–they're the ones who can figure out the human interface for a vast chain. If they do their job right, the result–a working ecosystem–is a far better platform for innovation than an isolated product. Just think about Apple and how its products have expanded from iMacs to iPods, iTunes, iPhones, and iPads, all linked via its iCloud. Or Nike, whose body-computing foray began with Nike+ and has evolved into the Fuelband, which aims to rebrand the calorie, for an age filled with networked devices.

Commoditization Pushes Designers to the Fore

Innovation usually cycles between periods of raw, technical inventiveness and the finer task of packaging it for mass adoption. In personal tech, for example, we're in an integration phase that comes on the heels of fundamental advances such as the Internet and mobile computing. With back-end magic becoming a cheap utility, user interfaces are now a startup's best chance to break out.

Consider Bump, an app that lets users swap data between phones simply by bumping them together. Its cofounder, Dave Lieb, notes that in the first dotcom rush, online enterprises had to build their infrastructures from scratch, so engineers were paramount. In our app economy, everything has changed. Bump had 1 million users before it spent $1,000. It didn't need infrastructure, thanks to Amazon's server-hosting service; it didn't need advertising because of social media; and the App Store solved any distribution problem. Development was a breeze, too, because of Apple's software developer kit. "These are all things that used to cost millions," Lieb says.

Although these dynamics seem specific to the tech business, they're analogous to what happens in any maturing industry. The back-end nuts and bolts eventually fade as a competitive advantage: Your manufacturing prowess, once a reliable bulwark, moves to China; your distribution channels, once the best, are now beaten by the Internet. When that happens, how can you sell anything–from a new thermostat to a new passenger plane–without fundamental design improvements that prove their worth to consumers with every use? And whom do you trust to cultivate that relationship between your product and your customer? An engineer? Or a designer?

"Product guys," rather than engineers, steer many of the startups that draw the greatest buzz. Silicon Valley is currently engaged in an all-out talent war over designers. "The market for engineers is always white-hot. But for designers, it's hotter," says Jeff Jordan, a partner at VC firm Andreessen Horowitz, which has backed design-driven startups such as Facebook, Jawbone, and Lytro. The story of Kelsey Falter, a 22-year-old graphic designer, brings Jordan's point to life. Five years ago, it would have been hard for Falter to convince an angel about her bona fides as a would-be CEO. But this year, as a senior at Notre Dame, she received initial seed funding of $640,000 to start PopTip, a real-time polling app for Twitter. Her focus is on front-end work, not back-end engineering. Falter says her design education helped her understand the subtle tipping point when a quirk in consumer behavior creates an opening for a better product–or a new one.

The phenomenon of designer-led startups, which also includes companies such as Pinterest and Path, is a telling variation on something legendary Braun designer Dieter Rams once told me. "My work was only possible because I was reporting directly to the chairman of the board," he admitted. "Design has to be insulated at a high level. Otherwise, you can forget it." His masterpieces for Braun, created from the 1950s to the 1970s, made him a saint of modern design, but only because he enjoyed unparalleled access to the C-suite. It's no accident that Rams's most influential fan, Jonathan Ive, had a mind-meld with Steve Jobs. Without that, Ive could never have accomplished what he has at Apple.

When designers lack influence, superb products become almost impossible. Good designs seldom stay good for very long if they must navigate a gauntlet of corporate approval. That's because the design process is as much reductive as anything else–figuring what can be simplified and taken out. Corporate approvals are usually about adding things on to appease internal overseers. When something has been approved by everyone, it may be loved by none. Just look at what happened to Microsoft in the 2000s and how only now is it trying to redefine itself by building a more design-driven culture. That culture spawned Windows 8, whose design intent has remained remarkably pure from beginning to end. Solving these design dilemmas has become job one for leading companies. It's worth noting that some of Nike's most remarkable innovations have come during the tenure of CEO Mark Parker, who started his career as a designer.

If Design Leads, Then Relentless Innovation Is the Norm

The main question remaining for VCs and old-line companies alike is whether design can deliver a sustainable edge. There's reason to think that it can. Unlike a few more features or marginal increases in computing speed, a better user experience can mean everything. When Path, today's most elegantly designed social networking app, launched in November 2010, it was quirky, textured, and a little bit too complicated. The second version, released a year later, cut the core interactions down to one simple screen and had plenty of lively touches, such as an animated share menu created with input from Pixar. Path's hockey-stick growth from 30,000 users to 300,000 in one month began only after the release of version 2.0. And its present valuation, rumored to be about $250 million, has less to do with users than the user experience Path has created–and the number of people in tech hoping to solve the same set of problems. I asked co-founder and CEO Dave Morin, an Apple and Facebook alum, whether attracting capital was hard, given that his investor pitch was based on user experience rather than technological wizardry. "You can pop a tech-driven startup extraordinarily fast," he acknowledged, "but VCs are starting to see that having designer founders pays off in the long run."

A reliance on design-driven innovation poses a challenge for the companies that live by it: You can't easily patent how something looks, or the feel of a user interface. Features, subtleties, and finishes spawn imitators with unprecedented speed. That means that design-led companies must innovate constantly to maintain their edge. And that's exactly what makes the stories in this issue so interesting.

Microsoft, having stagnated as Apple turned the vision of perfectly integrated software and hardware into an ocean of cash, now has its own road map in place, aimed squarely at the evolving future of mobile computing. The central plank of that strategy is a radical redesign of Windows 8, built for the touch-screen revolution and ready to power Microsoft's first major foray into hardware, the Surface tablet. For Microsoft, the question is, how intuitive will users find Windows 8? Natural enough that it won't suffer the disastrous fate of Vista? Strong enough to withstand the critiques that inevitably follow from rethinking one of the most heavily used products on the planet?

A hot startup such as Pinterest has different design challenges. Ben Silbermann, Evan Sharp, and their team have built one of the most addictive websites on the planet, which lets users curate and show off their tastes like an art collection. Can they evolve that user experience in a way that will make them money–whether retail, advertising, or some other novel form–while keeping their users rabidly engaged? But notice what unites Pinterest and Microsoft: Ultimately, each company's success hinges upon how well it intuits what users want and how much each pleases them with products. Only design has that power to seduce and delight.

Design isn't being looked at as a solution to only business problems. Its practitioners are now taking up roles that used to be dominated by not-for-profits and governments, seeking new ways to raise the fortunes of the developing world. Brazilian architect Marcelo Rosenbaum is using his expertise to repair the fractured bonds in favelas. Elsewhere, in our first Innovation by Design Awards, projects such as the Embrace Infant Warmer, a low-cost incubator, and the BioLite CampStove, a hyper-fuel-efficient cooking device, aim to significantly improve and even save the lives of people in poor countries with little modern infrastructure. You'll see these projects alongside other impressive finalists such as the Boeing 787 Dreamliner, which dramatically improves the economics of long-haul flights, and the Nest Thermostat, which takes an often clumsy, hard-to-use product and gives it a complete makeover.

What everything in this issue shares is a motivating ethos that Watson also hinted at during his Wharton speech, just before the quote that everyone knows. "We are convinced," he said, "that good design can materially help make a good product reach its full potential." Replace product with business. Or even person. In every instance, the wisdom rings true.

A version of this article appears in the October 2012 issue of Fast Company.