Keeping up with innovation
Alex Osterwalder, author of ‘Business Model Generation’, helps new and old companies to better understand how to most profit from business models and is developing new tools to keep up with innovation. He shares his thoughts about the future of the business model.
It’s been almost 10 years since your book ‘Business Model Generation’ was published. What has changed since the book was published in terms of how companies use business models today?
The adoption of my Business Model Canvas has been phenomenal. Literally millions of people are using it, from startups all the way up to large companies. I think people do now use this as a shared language to better discuss business models. But understanding business models and competing on business models hasn’t changed. Too many companies compete on products, price, and technology. I’m not saying that’s wrong. You do need to have great products and great technology, but it’s not enough. Too few companies really understand how to compete with better business models. I believe better business models will almost always outcompete better products. The other thing that has changed is that people are now combining the Business Model Canvas with Value Proposition Canvas, and they’re starting to test business models a bit more systematically.
What common mistakes do companies still make when they’re creating their business model?
There are a couple of innovation myths that hold people back. The biggest myth is that innovation needs technology innovation. But technology innovation is a subset of innovation. For example, when Nintendo launched the Wii, it was actually offering an inferior technological platform. But it outcompeted everybody else because it was targeting an unexplored market of casual gamers with a new value proposition. It had fun motion control not based on crazy technology, and that led to a very profitable business model. The big mistake is that everybody is way too technology-focused. That doesn’t mean you can’t innovate with technology. But I do believe people underestimate the importance of business models because, at the end of the day, it’s not about launching a new technology or a new product. It’s about building new growth engines that create more value for customers and more value for businesses. That’s the goal. And there is still the lack of focus on customer value and business value.
Can you give some more specific examples of companies using the Business Model Canvas?
German pharmaceutical company Bayer now systematically uses the Business Model Canvas with customer development and lean startup. Sometimes you can’t pivot yourself to success, you actually have to do the projects. When you innovate in a larger organisation, you’ll have many projects that you start and you give them a little bit of money to test and then, after some months, you only invest in where you see promising results in terms of evidence and an emerging business opportunity. Over the last three years, Bayer has invested in 68 projects. It made follow-up investments in 21 and then, from those 21, it only made follow-up investments in six. It’s contrary to how we usually fund projects – we give them money and expect them to succeed. But that’s not how innovation works, and that’s not how the startup world works. I can also mention ShapeScale, which is another interesting company, one that I am personally invested in, that needed to come up with more interesting business models. Its product is basically a scale that takes a 3D image of your body and predicts how your body might evolve. It had to think deeply about the business models – if it just sold the hardware, the scale, it’s a one-time transaction, and it’s hard to sustain long-term profitability when you are selling hardware. Currently, it’s turning this into a platform where a scale is a place where applications can come together and you can subscribe to the scale. It is hard to survive just based on technology and hardware innovation. You need to think very intensively on how to create a business model that is not just based on hardware. A big challenge for technology companies is how to not just sell widgets but create a sustainable business model.
Are there other tools for driving growth that you can recommend for entrepreneurs to use?
One tool, which I have created together with entrepreneur and author Dave Gray, is the Culture Map. Culture is incredibly important in any company that has more than one person. As soon as you have a co-founder, you have a culture. Entrepreneurs address the culture aspect too late, as it is not the most important goal. But in order to succeed, you need the right company culture. The Culture Map has been a very valuable tool for designing company culture. The other tool we are working on measures innovation. How do you measure progress from idea to business? You look at three to four things. Desirability – do my customers want this? Feasibility – can I build it? Viability – can I make more money from it than it costs me? And adaptability – can this survive over time? If I look at those four risk areas, I can ask myself how much evidence do I have to show that it’s a desirable business. Innovation metrics is something we’ve been working on for the last two years and we have a new innovation metrics tool in the works.
You are working more with bigger established companies. How do you see them transform their business models?
It can be a real challenge for established companies because they are designed to manage their existing business model and to get better and better at what they already do. Look at Kodak, which was very good at an analogue film. All of its investments were in factories designed to process and manufacture film. It was also very good at technology (the company actually invented the digital camera), but it wasn’t able to adapt its business model. It made a pivot in the wrong direction, investing instead in the declining printing industry, aiming to replicate what HP had already built. And that was the death penalty for Kodak. But here’s a counter-example. Japanese company Fujifilm, which was number two on the market, was also in fear of going out of business. But it pivoted into cosmetics because of its experience with analogue film chemicals that also turned out to be good for the skin. It applied its know-how to skincare and developed a high-end skincare line.
And if you take Dutch company Philips, which used to make light bulbs and televisions but now focuses on digital health technologies, the hardest transition for them was to move from hardware to software because Philips was always more of a hardware company. But then it had to pivot to become a software company. And with software, you can test things a lot faster. But here’s another myth – believing that you need to build something physical to test an idea. The more it costs to build something, the more you want to test it without building it. So instead of making a prototype, make a brochure that describes how this device will perform. You need to understand customer pains and gains and not if you can build a solution. People focus on solutions way too early. We need to create a little more creativity in the testing area and creativity means sometimes you don’t need the finished product – you only need to test it if people have the budget for it.
Your new book ‘The Invincible Company’ comes out next January. Can you tell me more about the book?
There are two parts. One is about what we call business model mechanics. So people can understand how to compete on business models instead of just competing on products, price, and technology. We show, in a very systematic approach, how you can compete on business models. For example, creating recurring revenues instead of transactional revenues. So instead of selling devices again and again, how you can create recurring revenues. These business mechanics are very powerful. We also show how to transform from a product to a service, like from VHS to Netflix. The other part is about how a company can manage a portfolio of business models. Most companies should think of the future while they’re successful. As a startup, you just want to build your first business, but once you’re starting to be successful, you’ll probably need to think of the next wave, because businesses die faster than ever before. You must learn to take the next step. If you’re a company like Nestlé or MasterCard, it’s even more important that you manage your portfolio. You need a portfolio of new ideas and you need a portfolio of existing businesses and we show how companies can better manage that in order to stay competitive. A lot of the big players are likely to disappear. Look at the banking or pharmaceutical industries. Many of those business models have expired, but the companies are not ready for tomorrow yet. The writing is on the wall.
Tell me what are you currently most excited about?
There’s a huge opportunity in management innovation. I see a lot of people who are unhappy in their workplace – we need to create better workplaces where people are engaged, can do their best work and have a good time. It’s not about table tennis tables, it’s about being treated decently. We spend 8-16 hours a day at work, and if you create a great workplace, then you have made an impact on the world because when people go home to their families, they’ll be in a better mood. If you’ve had a crappy day at work, you’re not going to be the most fun person to hang around. This is especially important with the millennials because they don’t stay if they don’t feel any purpose. You need the right culture, management, and methods. Also, I’m very passionate about helping large companies to innovate. And the reason is simple. If a large company goes out of business, it affects a lot of lives, a lot of people lose jobs, and it has a terrible impact on communities. I think helping large companies to innovate has a very positive impact because we can create more stable workplaces.
Alex Osterwalder is a Swiss business theorist, author, speaker and entrepreneur, known for his work on business modelling and the development of the Business Model Canvas.
Since publishing this article also “The Invincible Company” has been published.