E160 | Innovating Your Business Model with Alex Osterwalder
“We bring all of the tools and methods into everything we do for the companies we work with. We call it technology enabled services. We help large companies like MasterCard, WL Gore, Nestle, and so on, reinvent themselves.”
This is Alex Osterwalder, entrepreneur, author and co-founder of Strategyzer.com. Alex believes that innovation is what your business needs for longevity and success. He also believes that successful companies are those that compete at the level of business model, not just at the level of product, service, or price.
“Innovation is not a talent or idea problem. It’s a process and culture problem. Companies are not putting in place the right systems for the great innovators and great ideas to emerge. People on the ground know very well what could work, but we don’t give them the space to explore. And if that doesn’t change, a lot of companies are actually going to pay the price and go out of business.”
Alex knows what the challenges are in driving innovation. He knows what needs to be done in terms of structure, power and resources. And he knows how company culture fits into a business model. And in this incredibly insightful episode, he shares his thoughts and actionable processes with listeners.
“An invincible company has three characteristics – they always reinvent themselves, they compete not just on products, technology, price and service, they compete on superior business models. And they understand transcending industry boundaries. People who see themselves in one industry, usually that’s not going to play out well in the long term.”
It’s a slightly longer episode, so make sure you’re sitting comfortably, and don’t forget to bring a pen and paper, you’ll want to take notes.
On today’s podcast:
- Creating an innovation culture in a company
- Rethinking business models and business R&D
- Transcending industry boundaries
- Entrepreneurial CEOs don’t have to be founders
- Innovation needs money and power to succeed
- The monetary value of experience
The Importance of Business R&D with Alex Osterwalder
According to Alex Osterwalder, an invincible company is one that is constantly rethinking their business model. A business that wants to stay in just one industry is never going to survive long term. Companies need to break out of industry boundaries if they want to be around for the long haul.
Think about Apple, for example, they’re in the phone making business and yes they make money from phones, but they also do software.
“The challenge is to stay in the same mindset and not be squeezed into one area. But figure out ‘how can I create the most value for customers, not just with one product but with a superior and better business model?’”
Rethinking business models
The idea of disruptive innovation – where you don’t change your business model once you have it, you just keep reworking it, rethinking it, to make it better and better, ‘incremental innovation’ Alex calls it, won’t help your business do anything other than die more efficiently.
The challenge for all companies, big and small, when trying to improve and scale your business, you need to not just create new products, services and technologies, you need to constantly be thinking about the next growth engine. And the key says Alex, is not just to think, but to actually experiment.
He calls this ‘Business R&D’.
“The challenge is it’s a different mindset. You need to reinvent yourself while you’re successful. You need to put energy into that. And there’s no company probably on the planet that doesn’t look at innovation and do some form of innovation. But they usually don’t take it seriously enough.”
The thing about innovation is you don’t start with the perfect solution. You have to do tons of experimentation and experience tons of failure in order to figure out what works and what doesn’t. To have big wins you have to have big failures.
Just look at Amazon, and their Amazon Web Services, they’re constantly innovating:
“This is a big lesson for everybody. Even your competitors will come from very unexpected places. I mean, come on, who would have ever thought that a book retailer would disrupt IBM?”
Small and large companies should be afraid of new competitors transcending industry boundaries – coming from unexpected places and disrupting them.
And it’s not innovation if you know what you’re doing.
“What we need to do in innovation, and we know this from venture capital and early-stage venture capital, in particular, you can’t pick the winner in innovation, because if you can pick the winner, de facto you know. It’s not an innovation if you know it’s gonna work.”
In order for a company to be successful at innovating, they need to have a CEO who is fully committed to innovation, who understands that long term growth isn’t something that can be achieved overnight. And entrepreneurial CEOs don’t need to be founder CEOs to have that entrepreneurial spirit, they just need to be fully committed to innovation.
“I think the great innovators, they really think long term. Jeff Bezos likes to say, ‘Oh, you like our quarterly results? We made them five years ago, right.’ So you can’t innovate if you’re not thinking long term.”
But you need to be aware of the activist shareholders, they’re the biggest threat to innovation because they’re not interested in the long term, they’re interested in short term results.
There are three types of innovation:
- Efficiency innovation
- Sustaining innovation
- Transformative innovation
No one is better than the others, you need all three.
“The threat of inaction is getting bigger and bigger. So actually, not acting is the bigger threat for CEOs these days than investing in the future of the company. Just doing innovation theatre is often costing more and more CEOs their jobs.”
How to invest in business R&D
“We need to create this mini Silicon Valley within organisations where we invest more like venture capitalists. It’s not about technology, technology is expensive. This is business R&D. It’s accessible to every single company on the planet, from the three four person team all the way to 300,000 person teams.”
Here’s what you need to do – you have to realise that if you want to succeed, you need to invest in about 10 projects, but know that 6 of these ideas or projects will fail. You need to give your teams bandwidth to work and to let them run. Because you’re not investing in the ideas per se, you’re investing in the teams to come up with the ideas.
If you’re a small company, invest in 5-20 ideas or projects.
“You do this with the Lean Startup customer development approach from Steve Blank, you test, you test, you test, because the idea doesn’t matter. It’s the adaptation of the idea.”
Failure always sucks, there’s no getting around that. But don’t look at the return on the project, nor look at the return on the team, you look at the return on the whole portfolio. Because you aren’t investing in any one team to innovate, you’re investing in innovation as a whole.
Innovation is different to management. Management is about being on time and on budget, with innovation, you can’t determine that – as we said before, if you can predict what you’re going to do, it’s not innovation.
Also, don’t give each team money and command them to innovate and succeed, if you do this they won’t take risks and innovate because they’ll be afraid of failing. You need to let them know that each team will get the same resources, but at the end of it if you have, say, 5 teams, you’ll kill 4 of their projects and refocus every team member on the one remaining team project.
“[This way] you don’t lose a lot of money, you lose a little bit of money and you incrementally invest more in the ideas that are emerging. So it’s just a different mindset. You don’t look at investment per team, you look at investment on your portfolio.”
Exploit what you have, and explore the future. These are two worlds and each needs to be treated differently.
The Invincible Company
Alex’s book, The Invincible Company, is about how you can differentiate yourself through a more powerful business model. You can’t simply compete through products, technology and services.
“What we always try to do is make books that are timeless, for challenges that business people will face over decades. So it’s not as if these problems will go out of fashion, because it’s stuff that really takes a lot of commitment to get it right.”
Culture is also an underused tool in business, says Alex. Most people still think it’s a fuzzy thing, and many companies let culture happen, rather than deliberately design it.
“But you design culture like a garden, you take care of the fertile ground, you water it, you try this and that. So I think culture is a completely underused tool still in businesses because we think it’s this fuzzy thing. No, it’s not.”
The exploit and execution culture is different from the exploration culture. You need a different type of culture on both sides. And when you’re hiring, if your goal is to scale, hire people not for their future potential, but for their past experience, so they’re not making mistakes on your wallet. Play business like it’s a professional sport.
“Alex Ferguson is managing Man United, and they win the Premier League, or the championship or whatever. And he doesn’t say, you know what, I’m gonna hire somebody a bit cheaper and not as good as Wayne Rooney next year, because that’s just not a winning strategy.”
Choose A-players who fit your culture.