In this episode, we wanted to know, “What’s the latest from the mind of Alex Osterwalder?” To get best practices, InnoLead’s Kaitlin Milliken sat down with Osterwalder to discuss the challenges of business model innovation, the need to professionalize innovation, and some of the themes in his upcoming book. Read the transcript and see other resources below.
Additional Resources:
- Find out why Osterwalder says, “Business models expire like yogurt in the fridge.”
- Listen to Osterwalder discuss business model innovation.
- Listen to a podcast on business model innovation from season one of our show.
Transcript
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Kelsey Alpaio: You’re listening to Innovation Answered, the podcast for corporate innovators. In this episode, we wanted to explore the latest ideas from the mind of Alex Osterwalder. Alex is the creator of the Business Model Canvas, a tool for developing new or working with existing business models. He is also the founder of the innovation training and tools firm Strategyzer. Alex has also written several books — including the global best seller, Business Model Generation and the recently published Testing Business Ideas. His next book, The Invincible Company, will be out in the spring of 2020.
Innovation Answered Producer, Kaitlin Milliken, sat down with Alex in our Boston office. During the conversation, Alex discussed the challenges of business model innovation, the need to professionalize innovation, and some of the themes in his upcoming book.
[MUSIC FADES]
Kaitlin Milliken: Thank you so much for being here, Alex.
Alex Osterwalder: It’s a pleasure.
Kaitlin Milliken: So inside the innovation community, you’re a VIP. A lot of folks know you, maybe they’ve worked with you. But we might have some listeners who are new to the innovation community. Can you share a little bit about your background for those folks?
Alex Osterwalder: So the whole thing started out with a PhD I did on the topic of business models. So that’s how I met my PhD supervisor and my co-author, and now longtime collaborator, Yves Pigneur. And we’re best known for the business model canvas. But that was just a starting point, right? It’s one tool among the several tools we created. And we just tried to make business tools for leaders, innovation and beyond innovation, just to help them do a better job.
Kaitlin Milliken: So when it comes to business model, I know that’s something you’ve thought about a lot. Can you recap some of the biggest challenges that large corporations face when it comes to business model innovation?
Alex Osterwalder: I think innovation in general is a challenge for them, and it’s already… You know, there’s so many myths around innovation. Now, I like to use the terminology from Clay Christensen and his team where he talks about efficiency, innovation, you know, making things better that you already have. That’s relatively easy, and I think companies do that well. And sometimes it’s so sophisticated that people think, you know, “That’s real innovation. We’re using AI, we’re using robotics,” but they’re just making their existing business model more efficient. And I like to call that more efficiently die.
So if you want to stay alive, you need to go beyond that. And you need to do sustaining innovation that could be new products could be new channels. But again, that just keeps you alive. If you’re a car company and you make new cars, it’s just going to replace the old models. So just more or less going to keep you alive. Where you really get growth and where you really can get to the next level is with growth innovation. And that’s where business model innovation plays a big role. Creating new business models, or improving the business models you have we call that business model shift. And that sounds very scary, but it shouldn’t be because it’s just something that we need to be able to do, because with product innovations can be harder and harder to stay ahead. So companies need to relearn how to be entrepreneurs, because they used to be every company once was, you know, created by a group of entrepreneurs. But once you’re big, you forget how to do that. We need to get back to that.
Kaitlin Milliken: It’s really interesting that you talk about learning to be entrepreneurs. At large companies, it’s more about execution. Maybe they’re not even hiring people with the entrepreneur mindset. What infrastructure do you need to build in order to help people start thinking like entrepreneurs and then get those innovation wins?
Alex Osterwalder: We created something that we call the innovation readiness scorecard. Because to get really good at innovation, you actually need to change a couple of things. The first one, I would say, is to give innovation power. There’s no company on the planet that doesn’t, you know, do something in innovation, but we could call it, like Steve Blank does — you know the grandfather of the Lean Startup movement — we could call it innovation theater. It’s just for the show. It’s not the real thing. We need to give, you know, innovation a real place in the org chart.
And I like to say, you know, “Wouldn’t it be cool if we had a chief entrepreneur who is as powerful as the CEO.” They’re the same level, the CEO takes care of the present, which most CEOs do today. And the chief entrepreneur takes care of the future, invents the future. And as soon as a business is big enough, you can hand it over to the CEO.
The second thing is to put in place the right processes, cultures, and metrics for innovation to actually happen. This is very different from execution. So in execution, you give people money in a project, and you expect it to succeed. Great, that’s normal, and you should get fired. If you don’t succeed, right? Failure is not an option in execution.
Now in innovation, failure is not the goal either, but it’s an inevitable side product. You can’t avoid innovation it’s just going to happen. Right? And Jeff Bezos likes to say you know, Amazon is one of the world’s best innovators, likes to say that, that failure and success are inseparable twins. You can’t have one without the other.
So we need to create a space where we can experiment a lot. But here’s the big thing. It’s kind of the dirty secret of the Lean Startup movement. You can’t pivot yourself to success. Sometimes you just need to kill a project.
Or even better. I talked to the CEO of Logitech a couple of weeks ago. He said, “Don’t use that word, Alex, use the word shelf, the project. Because it’s like a book, right? You’re going to put it away. You got value from it. You learned from it. Maybe you’ll take it back again one day.” The ratio actually is 250. To one to get one outsized success, one outlier, one investment that gives you more than 50x return, you should invest in 250 projects.
That’s the statistics in early stage venture capital, which is a great proxy. And today, you know, large companies don’t have that logic. That’s one of the big things that we should put in place. This culture of having a series of failures because the big successes will be one out of 250. And if you are an established company, you know 50 million or 100 million, you know, as a revenue stream, new revenue stream, is not enough, you might need to have a billion or 5 billion. So that’s hard to do. So we need to change a lot to make innovation happen.
Kaitlin Milliken: Changing the culture is very difficult, especially at companies that have been around for years and years, and there’s a lot of history. Who do you need on board to get to the point where you can make a difference in the culture?
Alex Osterwalder: Well, you need number one, the board, on board and the leadership. Because if they’re not behind it, it’s not going to happen. And one thing that’s important to understand it’s not about replacing an execution culture. It’s adding a culture. It’s two cultures under one roof, right, what we like to call the ambidextrous organization, and people have been talking about that for a long time, but it’s not really happening. Because we’re prioritizing the short term, we’re prioritizing things that can give you a return. without too much risk. Quarterly results, etc. That’s the execution culture. And that’s actually fine. We should keep that. But we need to create that additional innovation culture. And they need to be partnerships hands in hand.
And you know, sometimes innovators they like to call themselves pirates. I it makes me angry because historically, what do we do with pirates: We kill them. Right? So don’t call yourself a pirate, if you’re an innovator. We need to create a culture, where innovation is just the normal thing. We’re creating the future. And it needs to go hand in hand with the execution culture. So you need top management on board.
But what you really need to understand is that you can design culture, culture shouldn’t just happen and it doesn’t just happen. And you see it in the startup world. It’s not enough to put ping pong tables or foosball tables in a room or you know, “Oh, we’re now we’re now WeWorks.” No, it’s not about that. It’s about the metrics. It’s about what you reward. It’s about career path.
Today, innovation is not a career path. Anybody who’s in innovation today in 80 percent of the company, It’s career suicide, right? So we need to make innovation a career path. That’s all part of the culture. Hard to do. That’s why we need the top management on board. And they are the only ones who can actually make those enablers happen, put them in place. Things like metrics, we’re measuring different things. Only top management can do that.
Kaitlin Milliken: You also touch on the idea of creating a space where you can have this different type of culture, the rules are different. The metrics are different. Do you mean an innovation lab or a center? Like what space are you thinking about?
Alex Osterwalder: So first and foremost, I mean, a cultural space, you need intellectual space with the right metrics. But that includes everything you said, right? It’s all those things that we already have today to a certain extent in companies, but they don’t have enough clout, and they’re not connected. It needs to be strategic, orchestrated approach, where all of these things are connected together. So we can build a real innovation funnel where you might have 250 projects starting out, but then you do gradual, you know, investments and you weed out 50 percent after eight weeks, and then 50 percent after three months. So you gradually invest more, we like to call metered funding now. Those are the things you need to put in place.
That’s, that’s an intellectual space with the different metrics. And that shouldn’t be completely separated. It should be integrated with execution. So innovation engine and execution engine should be a partnership, but I do believe you should have in that new space, professional innovators. So you can’t do it 20 percent on Friday afternoon. That’s insane. We have professional marketers. We have professional finance people. We have professional operations people. Why don’t we have professional innovators? It’s a different profession. And because we’re not treating it like a profession, we’re not getting innovation, right?
And then somebody says, “Oh, everybody needs to be an innovator.” Bullshit.
So what you want is yes, you want some innovation in the execution engine, but that’s different than in this new space, where growth growth engines require a completely different approach. And there, I would think about the professional entrepreneur who is paid, who has a salary to continue to do this every year. And maybe for three years, they’re not successful. That’s okay. Because maybe they were exploring something’s not the right timing. But then in the third project, they will win. They will advance, right? So professional innovators that don’t risk as much as, you know, entrepreneurs out there. So you can give them a base salary, and you’ll attract different type of entrepreneur, maybe.
Not everybody’s made for the hardcore entrepreneurship with VC backed funding. That’s tough. That’s really tough. And it’s not for everybody. But you can have the middle thing, right between, you know, salary for being really good at execution. What if we had paid entrepreneurs, I think that could really work. In a company, all the innovators should benefit from the success together. So if you’re investing in 100 projects, those that fail are actually contributing to the success because the one that wins will only win because you have the other ones. So maybe the team that gets all the way to the end will get a little bit more, you know, in terms of ratio, but those who don’t succeed are still part of the journey. So they should be rewarded for that as well.
Kaitlin Milliken: I’d love to talk a little bit more about the professionalization of innovation as a career. We recently had a live call about that, and one of the problems the presenters identified was titles that have been made up. They’re tailor made to a specific person, and then once that person moves on to a new job, it goes away. So that innovation position is gone, because it wasn’t a formalized title or role. How do you tackle that or approach that?
Alex Osterwalder: So I think title is the one thing, but we’re not lacking titles, right? I think the bigger challenge is that, you know, we still have this mindset. Sometimes, it’s not as black and white, of course, but we say hey, we need to take some fresh people you know, from the university they’re young. They’re dynamic. That’s all great. But now you’re going to have somebody who has no legitimacy in the company. So we need a mix between very senior people who are the end of their career. And we need people with the right skills. Because today at universities, I think we’re training innovators better than ever before. And many of the people coming out of universities have the better skill set because they’re trained more professionally than those who are in innovation today.
But I think that the bigger challenge I see is really the skill set. So today, you know, everybody says, “We do we do lean startup, right? We do all this.” But it’s still a bit of an ideology. So yes, you follow the principles. But what kind of experiments do you do beyond interviews and surveys and maybe the occasional landing page, right?
We just came out with a book called Testing Business Ideas, and it’s a library of 44 experiments to show their you know, this is this is not just an art, this is now a profession. You will never take away the art of entrepreneurship and innovation. But there’s also the profession you can teach the skills that goes to innovation metrics. So today people say we do innovation accounting. Then you scratch on the surface, what do you get is really light right? But now there are better metrics to measure are we reducing risk and uncertainty of new ideas it’s getting really professional. And we can teach it a little bit like we teach doctors and medical students. I think it should be similar in innovation and entrepreneurship. You do have to learn by doing can’t learn by reading books. Same in medicine. You learn the basics by reading books, and then you start sniffing around on dead bodies before he get this snip around on the live bodies should be the same in innovation.
Kaitlin Milliken: Who is doing a good job of this type of work?
Alex Osterwalder: So one of my favorites is still at W.L. Gore, the materials company. So very fun company because they you know, they have a long tradition of doing innovative things, have an innovative culture and so… And they got really hooked a doing this. They did two things. They looked at coming up with completely new ideas where they would really follow the Lean Startup approach. They invest in many projects. But at the same time, they also try to reinvent the existing business units. It’s not either/or. It’s and. It’s invent and improve. We like to call it invent and improve, right, explore and exploit. And they really got hooked by doing this, even the senior leaders, you know, of these business units. They get out there, they roll up their sleeves, and they do these things. So you can get really, really good at doing this by going beyond the traditional interviews and surveys.
Kaitlin Milliken: I know you have another book that’ll be out in the spring, called The Invincible Company. What can the innovation community expect to learn from that book?
Alex Osterwalder: We always asked ourselves, with Yves my co author, “Why are companies still not innovating?” And we don’t say, “They are stupid.” We ask ourselves, “What are we still doing wrong?” And one of the things we realize is with the business model canvas as one tool really spread around the world. Literally millions of people have downloaded this and are using this. And you’ll find this across the world, from startups incubators to large companies. But that’s for let’s call it more the doers, the innovators who are on the ground changing things. But we were asking ourselves, could we replicate that success of a shared language at the senior level? Could we demystify innovation, which is still a black box for a lot of senior leaders. It’s not that they don’t take it seriously, but they don’t really know exactly what to do.
It’s easier to do mergers and acquisitions because they have a checklist, you know, the lawyers have a checklist. The analysts have a checklist. Innovation is a bit of a black box. So in that book, we’re talking about a new tool called “The Business Portfolio Map.” And what we show there is that as an invincible company, you do a couple of things.
Number one, you need to manage your existing portfolio of businesses, most companies do that. But at the same time, you need to create a portfolio of new ventures, internal and external, not just startups, but also internal projects. You need to manage that portfolio so you don’t get disrupted. So it’s the principles of the ambidextrous organization, but we try to make it practical with a new tool called the Business Portfolio Map.
And then the second aspect of that book is we think that companies are still not very good at doing business model innovation. What’s really great is when you start to understand how can you shift your business model, from old one to new one, from product to service, from low-tech to high-tech, from high-tech to low-tech. And you go beyond competing on product, technology, and price, because that’s a harder and harder competition.
And my favorite example at the moment is a Chinese company and financial conglomerate, called Ping An. And what they did amazingly —and I don’t see any other banking or finance insurance on the planet who does that — moving from really big and successful financial conglomerate in insurance and banking towards becoming a technology company. So one moment, they said, “We want to shift from a traditional finance company to become a technology company.” And then they invested 10 percent of their profits every year in business model innovation, and they created that culture. And now it’s a technology company. It’s unbelievable. It’s a great case study to follow.
Kaitlin Milliken: I love hearing these success stories. I feel like our community can learn so much from them. But I’m going to swing to the opposite direction and ask, what happens when companies fail to be thinking in that forward, future-focused mindset?
Alex Osterwalder: I think it’s very simple. I think a lot of companies are going to die and they’re actually, a lot of them are going to die efficiently. Because they’re going to do their cost cutting projects. They’re going to, you know, work with a lot of technology and that’s great, and you shouldn’t neglect that, so not making fun of that. But it’s not enough, right? So you’re just going to more efficiently die.
So if you don’t create that dual portfolio, explore and exploit both together, you’re going to die. It’s inevitable a lot of companies are going to go away. And we know that the lifespan of companies is shorter and shorter. I do you think some, you know, some industries like finance insurance, they’ve been around they have they were protected, still, you could say maybe through regulation. But you know, nothing’s protecting them anymore. Same in the pharmaceutical industry. It’s going to happen, and it’s just a question of time. And we’ve already seen it, obviously, in the technology sector, you know. Just think Blackberry. Think Nokia. Think, Kodak is a great example. Because there’s a counter example with Fujifilm. And we’ve seen examples in the past. What’s different now is we can systematically do it and that’s why we created this new language, the business portfolio map, because we believe you can proactively, systematically reinvent your company and become invincible. But the only way to become invincible is to be humble enough to know, you can’t if you don’t reinvent yourself all the time.
And that’s why Amazon has this culture of Day One. And you got to listen to this video where Jeff Bezos talks to his team, and he explains what day two is. You know, when you get complacent, when you get arrogant, and when you will — and he ends his speech with that — you die. Right? So you need to keep this culture of Day One. You need to reinvent yourself. You can’t get arrogant. It’s too competitive today to be arrogant.
Kaitlin Milliken: They have a really great culture when it comes to urgency to, which is really interesting.
Alex Osterwalder: And you know, we talked about Amazon. People say, “Yeah, but Alex, you can’t, you know. Amazon does bad things.” Well, look, I mean, no company today is yet perfect when it comes to innovation culture. I think Amazon is great. In other areas, they’re only catching up.
So, you know, there’s examples where you can say, “Okay, this is a counterexample.” Like Unilever said, “It’s not just about growth. It’s also about the environment. And the, you know, sustainability doesn’t come at the expense of the environment.” So there’s some wonderful examples. There where we can talk about innovation culture, also looking at the future of the planet in the society. So it’s not just about financial growth. And that’s where, I think, Unilever did a pretty good job.
Kaitlin Milliken: So I think that we really established how important it is to be thinking in a manner that results in a diverse portfolio. But that can be really intimidating to get started on. If you don’t have a deep innovation background as a company. Do you have any advice or tips for those early stage folks who are just starting to explore this realm?
Alex Osterwalder: So one of the things we like to do at Strategyzer is just get 10 teams to explore 10 ideas. We call this a discovery sprint. And this you can do with 20 percent of people’s time, and you just accept that of the 10 teams that are exploring, maybe one or two will at the end after a year get to something really big. But the way you need to structure is you start with 10 teams, you give them eight to 12 weeks to do this kind of discovery sprint, and after 12 weeks, you pick maybe 50 percent. You pick five teams that show most evidence. Who found evidence? Who found some traction? Then you give those five teams, you know, a bit more budget, so then it gets a little bit more expensive, and you want them to spend maybe, you know, 80 to 100 percent of their time for three to four months to do the next sprint. And then after four months, again, you invest in the team that gets most traction. And then you might have you know, two or one team that does a six months kind of sprint, which we call acceleration sprint.
So that’s what we call an innovation funnel, which can start very small. And you can always stop after those 10 teams that doesn’t cost you big budget and I’d say something maybe between $50,000 to 150,000. If you’re an established company, you can’t afford that, well then just make peace with the fact that you’re probably going to get disrupted and will die, right? I mean, that’s nothing. That’s peanuts for established companies. It’s when we get to the multimillion dollar budgets that there’s more accountability. But even that, you know, if we look at how much we put in R&D, and how much of that research and development actually goes to business model innovation and value proposition dimension, it’s a joke. The money should be there. It’s just that the tradition is not yet there. But you can start very small, you can get results, you can get comfortable with this.
And we’re doing this with a couple of companies just to get them to warm up, right? It’s not so hard. People think innovation is risky and expensive. No, it’s not. It’s actually risky and expensive when you do it wrong. When you do it right, you can decrease risk and uncertainty systematically because you start small with small funds. You’ll still get the big returns. Companies sometimes say, “Yeah, but we need the big returns. We need a billion dollar business.” Yeah, doesn’t mean you’re going to start with a billion dollars. You’re going to waste it. You’re going to burn it.
There’s great examples out there, you know, better place was a startup, they wasted $850 million. Or then you have Qualcomm with Flo TV. Wonderful example where they wasted over a billion dollars, right? Because they made a big bet. When you make a big, big bet, you’re gambling. What you really want to do is make many ,many, many small bets and then gradually increase the investment. So the logic is there, we know how to do it. It’s a question of willpower of the top management.
Kaitlin Milliken: So for those companies that may have that larger budget, maybe they’ve been in the game for a while. Do you have anything that you think those teams should be thinking about or advice they should have in their back pocket?
Alex Osterwalder: Yeah, so two good examples from Europe where they really put in place this idea of a funnel, beyond the 10 teams where the really investing is Bosch — the German engineering company and car parts company conglomerate — and the diversified company, Bayer, which is in the new maybe not always for the best reasons right now. But they really, you know, invest in 40 to 80 teams every year. And they get results, because they’re doing this metered funding. They’re gradually doing that.
So I think in those companies, we’re starting to do the right thing. But those teams might not have the visibility they need yet. And a lot of the larger players are still focusing on mergers and acquisitions, which is not wrong. But that’s only part of the game. So what I would like top management to see doing more, is playing the full game, right? All the way from inventing stuff, to big mergers and acquisitions. And it turns out that when you do this learning inside, this experimentation, you will make better acquisitions. And sometimes, you know, it’s smaller acquisitions as well could be in the $10 to 15 million acquisitions, not in the billions, because you will plug a hole that you don’t have in the technology because you’re consuming goods, and you’re going into data driven. Those are the kind of things we need to get a lot more comfortable with.
Kaitlin Milliken: So this is my last question. We talked about so many different topics. What’s the one thing that you want the InnoLead community to be thinking about or leave with when this podcast is over?
Alex Osterwalder: Making this black box of innovation? You know, help senior leaders understand this. I know this is part of your mission. But I think keeping it very practical, using the terminology that leaders use, like risk. I think we need to go beyond the innovation community, and the innovation community needs to stop using jargon. Let’s us use the terms you know that that will get the ear of the decision makers in the boards on the planet. And in particular, the boards I think are the ones we need to educate.
Kaitlin Milliken: All right. Thank you so much for sharing all your insights and joining us Alex.
Alex Osterwalder: Thanks for having me. It was a pleasure.
[ACKNOWLEDGEMENTS]
Kelsey Alpaio: We hope you enjoyed this episode of our show. I’m Kelsey Alpaio. This episode was reported and produced by Kaitlin Milliken. Editorial assistance was provided by Molli DeRosa. Special thanks to Alex Osterwalder for chatting with us at our office.
Be sure to subscribe to Innovation Answered wherever you listen to podcasts. You can catch up on past episodes of the show, and get other bonus content on our website, innovationleader.com/podcast. Our final episode of the season will be out next week. But until then, thanks for listening and see you next time.
