Dr. Alexander Osterwalder is the lead author of the international bestseller Business Model Generation, passionate entrepreneur, and in-demand speaker.
Dr. Alexander Osterwalder is the lead author of the international bestseller Business Model Generation, passionate entrepreneur, and demanded speaker. He co-founded Strategyzer,
a software company specializing in tools and content for strategic management and innovation.
Dr. Osterwalder invented the “Business Model Canvas,” the strategic management tool to design, test, build, and manage business models, which is used by companies like Coca Cola, GE, P&G, Mastercard, Ericsson, LEGO, or 3M. He is a frequent keynote speaker in leading organizations and top universities around the world, including Stanford, Berkeley, MIT, IESE and IMD. Follow him online at @alexosterwalder.
(00:02) Show number 78 of CXOTalk. We’re always talking about transformation and innovation and a key component of that is the business model. I’m Michael Krigsman I’m here with my…how do I say it glorious, glorious co-host, Vala Afshar. Mr. Afshar how are you? I don’t think we should do fist bumps. No fist bumps because nobody can see so it’s become redundant if no one can see it.
(00:33) That’s really left me hanging. It’s a great way to start he show.
(00:36) So Vala today is the business model day.
(00:39) Todays the business model day and I think representing all executive who are trying to makes sense of disruption and innovation and velocity and how to stay relevant. I think we have a wonderful opportunity to learn from truly a global expert.
(00:54) Yes, we’re here with Alex Osterwalder, who is an entrepreneur, author and really I think the business model – I don’t know, what can I say. The business model king of the world.
(01:09) Business model king of the world.
(01:11) I mean it seriously. I’ve been an admirer of yours and reader of your books and a practitioner of your methods for years, so Alex Osterwalder, really our pleasure to welcome you to CXOTalk.
(01:24) It’s my pleasure to be here.
(01:27) Alex, we’d like for you to share a little bit about your background with our audience. But I wanted to share your bio on Twitter, which is Alex Osterwalder, and it’s, won’t rest until senior executives and entrepreneurs operate like surgeons. I love that. so as you describe your background can you talk a little about how you plan to help us operate like surgeons.
(01:54) Yes, so I’m pretty passionate about business pools. When I was at business school, I did a Ph.D. on the topic for business models, but I really wanted to create business tools that were practical. And some of the pools that we’ve done with our team and with my co-author Yves Pigneur, we really see the difference when people use them. I think that in business, we’re very good at the operational stuff, accounting, finance. But when it comes to more to strategic issues, strategy and innovation I think we can do better.
(02:33) We can use tools more and the analogy I’d like to make connecting back to the way you introduced me is think of yourself having to go through heart surgery, pretty dramatic if you have to go through heart surgery. You’re in the operating theater and in comes your surgeon with one tool in his or her hands. A Swiss army knife. How did it feel? Probably not very good right.
(03:00) And I think today, strategy and innovation, sometimes were, (broken audio) what kind of business tools executives’ use and one of the top tools that came out was SWAT. Now I have nothing against SWAT, but I think we can do better.
(03:18) And if you look at how surgeons operate, well they ?to perform a heart surgery and they’re trained for 13 years to do that. so I think strategy and innovation is going to become a profession just like accounting or finance and we’re going to get better I think at designing things and designing value for positions. In particular because we have to, because business models don’t yield good in the fridge, right. So more pressure.
(03:49) You wrote a book called, Business Model Generation and you started a company called Strategyzer on the basis of that book. So tell us about that book and tell us what is a business model, let’s just start from the basis, what’s a business model?
(04:11) So at the heart of that book is a tool called The Business Model Canvas, and the business model canvas allows you to describe your business model as anine building blocks, with colored template that just allows you to visualize this business model. So you might think, well that’s nothing spectacular and everybody knows their business model and anybody in business can describe their business model.
(04:36) But if you ask people what is a business model you’ll get very different answers from very different people because everybody understands something else (broken audio)
(04:47) So what we did with the business model canvas – the heart of this last book Business Model Generation, create a shared language. So companies like MasterCard now use Business Model Canvas as a way to discuss how their creating value for their company and for their customers.
(05:04) So we need these shared languages to discuss terms that have been fuzzy today like business models, like value for propositions, plus we didn’t work on organizational culture. They are very fuzzy things. I think we can get more concrete and I think we can create a shared language and better describe it.
(05:22) So back to the business model, the Business Model Canvas is nine building blocks, the value of proposition, what you’re offering your customers, you’re target customers, who are you targeting with that value of proposition. How are you reaching them, which channels are you reaching them. Once you’re doing business with them, what kind of relationship are you establishing with them? Is it transactional, is it long term, is it personal.
(05:45) And then, how are you earning money in your business. Is it just subscriptions, is it through sales, so those kind of things. That’s what we call the front stage. Everything is visible to your customers.
(05:58) Then you have the backstage. So what do you need to create value customers and to reach your customers. What are the key resources, what kind of assets? Do you need a brand, do you need factories. What are the key things that you need to have to create and deliver value.
(06:13) Then the activities. What do you need to excel at, are you a company that’s really good at R & D, are you a company that’s really good at marketing. Not just all the activities that you do but all the key things in your business model that supports your business model.
(06:26) And then the key partners, who are you going to work with to leverage your business model, and if you look at those three components that I call Backstage if you want you can very quickly to forget your costs.
(06:37) Then you have a very beautiful, a big picture, the blueprint of your strategy if you want, on one piece of paper, one sheet, one poster of how you are earning and where you’re spending the money. Basically, the story of how you are creating, delivering and capturing value. And the powerful thing is that today, we don’t focus on that big picture enough. Very focused on products, and services but we don’t always understand the business model really well and in particular we don’t always think, hey, our business model is expiring, what am I going to build next? If you are a successful company, you don’t think of the next business model.
(07:25) Bestselling author and in your book is very visual and you use visuals to convey concepts. It’s a beautiful design, it’s as if it were designed in Cupertino and is there an emotional element to it. so it looks like you changed the product and perhaps even introduced a new business model in terms of introducing the book. Can you talk a little bit about that mindset and that process in terms of you know, producing a book that is widely considered you know a standard book in terms of business models.
(07:59) Yeah, so Business Model Generation sold a million copies and you know I the book world is actually quite a bit. But what’s more exciting people use the Business Small Canvas from the book, and I think the reason why this book was successful is because it differentiates from others, so we did pay a lot of attention to visuals.
(08:23) We made the book visual not just to make it different but because when you talk about business models, strategy and change, visualizations help you simplify complex things and think of it this way. This is why we use visuals in our book.
(08:41) Think back to the last business meeting that you had. A lot of smart people sitting around the table and a lot of talking, but sometimes we can kind of get lost because we can’t grasp the conversation.
(08:56) If you’d use a visual tool to capture, okay, we’re talking about the business model now, who are the customer segments and you put them there and you can come back to it. Now we’re going to move over here. The value proposition. We talked about these five elements and you visualize it, and you have something tangible.
(09:13) So what we like to say is we need to get out of the world of blah, blah, blah into a world of more strategic conversations, where we manipulate, just like somebody building a product with, something more concrete. The business model, the value of proposition and maybe even organization and culture.
(09:31) So we did that and translated that in the book and that’s why it’s a visual book because we really believe that visual thinking is crucial, and the tragic thing is the higher you go up in a company, the less you’ll find whiteboards or flipcharts in the boardrooms, right. Because we’re not used to that yet, but I do think it’s changing. The world is complex and that’s how you simplify.
(09:55) So we made it a landscape books with visuals because that’s how I think we’re going to be working in business around strategic issues. We’re going to make things tangible.
(10:04) So we differentiated the product and you know, every year 11,000 business books coming out – 11,000. That’s a pretty competitive field right. On top of 250,000 business books that already exist, how are you going to stand out?
(10:18) So by doing that, we did you now, kind of differentiate from others in addition to having a very practical business tool in the book which is also different from a lot of the business books today, which have great content, but don’t give you as a practitioner a tool.
(10:34) If I read a business book, I don’t want to be intellectually entertained. I’d love to have the time to do that, but what I really want is a tool that I can apply on Monday mornings. So that’s what we try to do in the whole format.
(10:49) So the business model canvas is very very simple, yet despite its simplicity, it’s the foundation of courses. Steve Brant, who I guess is the preeminent professor of entrepreneurial studies at Stanford, has a course based around it. so it’s deceptively simple, yet the implications are very deep. So what suggestions do you have for how to take best advantage of this simple idea?
(11:26)So Business models are a pretty broad topic. It can go from better managing your existing business model, or business models if you’re in a large company, all the way to re-inventing new business models. So really it depends on the objective.
(11:42) But number one, in the next business meeting that you have and you talk about your business model or strategy, you know get people around the business model canvas to sketch it out to make it tangible and you’ll see something pretty astonishing that you think everybody knows the business model. It’s not the case. I’ll give you an example.
(12:02) Toyota financial services, you know wanted to work on a couple of innovation projects to create new growth. So they use the business model canvas with their top 50 executives that came together and they sketched out the existing business model.
(12:21) Now, surprisingly it didn’t go that fast, that they would you know have their existing business model on a piece of paper in five minutes – no. they had to agree, who are we really creating value for, how are out target customers. What is the value proposition to those target customers? So even sketching out the existing business model can have advantages because you’ll make everything crystal clear. That’s number one.
(12:48) Then if you’re in a large company, you’ll want to start to create a playground to think about the business models of tomorrow, because business models expire faster than ever before and some companies pay the price. Take Eastman Kodak, take Nokia. How fast did their business models expire? If you take Nokia, they were at the top of the world just a decade ago and then their business model expired because they couldn’t re-invent themselves while they were existing.
(13:21) So you want to use these tools like the business model canvas to better execute your existing business and at the same time, create a playground to re-invent yourself.
(13:32) So it’s not either or, it’s and, right and that’s the hard thing. Most companies are really really good at execution but they execute their existing business model, so I’ll call it ‘forget’ re-inventing themselves, which is a bit unfair to put it that extreme way. But they don’t invest as much as they really should to create tomorrow. There are very few companies that do that, so unfortunately the example that comes up again and again and again is Amazon.
(14:02) Very few. That’s where you want to use these tools like the business model canvas.
(14:38) I believe it was Steve Blank who said, no business plan ever survived. First contact with a customer, and in the spirit of that we have a question from Twitter, from David Moor, and David asks Alex, what do you see as the most common mistake that leaders make with business models.
(14:58) So I’ll connect that question back to what I was just talking about,
(15:29) So to execute an existing business model, a business plan is a document because you can predict what’s going to happen. You know your market, you know the growth. Failure is not an option, okay. You don’t want to change that. anybody who says we want to become the innovative company. We want to innovate and everybody needs to be an innovator, that’s nonsense. You need executers; they execute the existing business model. There’s no space for failure.
(15:56) But here’s where the business plan makes no sense is on the other side, where you’re creating a space to search for the business models of tomorrow.
(16:05) When Stave Blank says no business plan will survive with contact with customer, what he means is you don’t know what’s going to work. So writing a business plan, refining your ideas, sketching out the numbers and predicting what’s going to happen is a waste of time, because it’s never going to happen that way. Never. There is no entrepreneur or no big business that can say, we executed our business plan everything happened like we described it. It’s a waste of time.
(16:37) So anybody who has spent two weeks or three weeks on a business plan for a new idea, has wasted his or her time. Business plans don’t work.
(16:47) I wonder how many of the 11,000 books would state what Alex just stated that business plans are a waste of time. That’s incredibly bold.
(16:56) That’s why his books are so influential.
(16:58) That’s right.
(16:59) And so useful because the concept is so similar. You know Steve Blank also – we keep coming back to Steve. You can tell we’re admirers of his as well.So he has said, the answers cannot be found within our four walls. What does that mean and how does that connect to the business model.
(17:21) So I like the fact that you’re connecting it with Steve Blanks work because we get along extremely well and we try to cross promote our ideas, because the business model canvas if you want you can see it as the business plan of the 21st Century. So instead of writing 50 pages you now have it on one page, you know if you can think very hard of your canvas.
(17:42) But here’s how it connects back to Steve Blanks customer development and to the whole idea of customer research and so on. You want to be able to sketch out a business model canvas and throw it away a minute later, because you’re exploring. And the moment you accept that you don’t know what’s going to work you can let go.
(18:04) So sketch out your idea very quickly and then test it immediately, so I’ll give you an example. You’re in a meeting room in a large company or in a startup it can be the same thing. You have an idea. You sketch out your idea with these tools, business model canvas, value for proposition canvas.
(18:22)Rather than now developing that for a week, what you want to do is the next day test that idea in the market. What I mean with that is not building a prototype – no. you start talking to customers. Get out of the building as Steve Blank would say and you start figuring out. Are the jobs pains and gains that I thought my customers have, are they really there? And what you’ll see is that you’ll have to throw away your business model canvas or your business plan on one page and start over. And that’s the process in the space of search. You’re going to prototype your idea, even before you start prototyping a product.
(19:04) And while we get out of the building and talk to customers and make experiments you’re going to learn. Here’s the way we draw it, we say, when you start out with an idea, uncertainty is at its maximum. You have no clue if it’s going to work. That’s just the honest reality right.
(19:20) So when you do have large uncertainty, you do cheap tests, you talk to customers, very cheap. You just get out of the building and talk to 10, 20, 30 potential customers. You’ll learn from that, you’ll reduce uncertainty, okay.
(19:33) The more you learn, the more you can invest into more tests. So when you have a certain amount of knowledge, then you can start building a prototype. The prototype will give you more knowledge. But you need to understand that you start with cheap tests. You’ll learn and you’ll reduce uncertainty and you increase the spending on your experiments until you reach a level where, okay, know I have enough evidence. So Steve Blank calls it evidence based entrepreneurship, the same thing for large companies. The more you know the more you can invest, and at one point you’ll say I have enough evidence now from the market, that I can turn into execution mode.
(20:01) And that’s the moment you can write a business plan because you have enough evidence gathered to switch from the search mode, searching for value of propositions that customers want and business models that work into execution mode, where you’re going to start building it.
(20:27) The problem today in most large companies is that they remunerate or even incentivize people to give you a business plan rather than to experiment. And why don’t most people experiment in most companies? Because they fear failure, okay. You don’t want to admit failure.
(20:46) Writing a beautiful business plan make it look that your idea’s going to work, okay. But saying I talked to 10 customers and they all said our idea sucked, nobody wants to do that in a large company because it can potentially mean the end of your career - you’re gone.
(21:02) But that’s what you need to do to provide the evidence this doesn’t work, this works – see what I mean so you actually prototype your business model canvas, you throw it away. You come up with a new one until you have evidence to say, this is going to work.
(21:15) Evidence so it’s basically when you finally move forward, it’s based on having a plan and having actual evidence from the customers so it’s evidence based.
(21:27) Definitely, so I’ll give you an example a very silly one, in the med-tech field. So let’s say you’re creating a new company in the med-tech space, and you can’t build a prototype because that’s already very expensive. So here’s a very simple test or experiment that you can do.
(21:44) You get some meetings, you talk to your potential customers. You figure out where it’s going and you give them the solution you have in mind. The value for proposition you have in mind. And then you give them a link. A simple link that you can track, okay, and you go back to your office.
(22:03) If that potential customer didn’t click on that link to get more information, you just told them there’s more information here about what we’re intending to do. If that potential customer didn’t click on that link which you can now measure in the anonymous space, they don’t know you’re tracking. They don’t know you’re checking if you’re clicking. They don’t click hat does it mean? It means they either don’t care at all, or they have something more important than reading about your potential solution.
(22:33) That means your potential solution is not addressing a big pain or a big issue that they have. so that little test is evidence, it’s very cheap evidence, okay, it’s not proof that your idea is going to work. But it already is a little bit of proof that you’re probably working on something that isn’t important enough for those people to investigate more.
(22:54) So you need to do many of those kinds of tests, even before you start building stuff. In particular in industries you know where you have capital expenditures, you can actually test things like that before you start spending money. That’s all evidence that’s going to tell you, should I throw away my first idea and take a new path and then go and test that again.
(23:19) Here’s the hard thing. It’s not linear. It’s interesting, you will advance and then you’ll see, this doesn’t work and you’re going to regress, okay. And regression is never well seen in an established company. You’ll be fired. But advancing, regressing, advancing, regressingadvancing, regressing, that’s exactly how innovation happens. There is no such thing as a linear path, to something you know disruptive and new, and the biggest growth engines, the biggest you know businesses are these kind of disruptive things that we have to explore.
You can’t just write a business plan. It’s not going to happen that way.
(23:56) Sure, so the business model canvas essentially allow you to crash test or test drive or really you know, simulate your thesis or hypothesis, your plan and determine where you need to make the corrections to achieve desired result.
(24:18) Absolutely, and there are two phases that you want to distinguish. So, let’s say you have your idea here and you want to go over here. Let’s say you know, if we’re in a large company we want to go from idea to at least the $500 million business or $1 million business, right.
(24:35)Traditionally, we would write a business plan and it’s that linear path. We all know that that’s not the truth, and it’s kind of like this right. So what do you want to do to get from here to here?
(24:45) You want to start sketching out some potential past. Different business models. One could be selling a product, one could be licensing a product, one could be creating a subscription model, you’re kind of designing your ideas.
(25:01)And here already, before testing it with the market, you can crash test the design. I’ll give you an example, my favorite example, I’m an espresso lover, I use this a lot and we can learn a lot from it is the nespresso, so you might know the espresso coffee machines with nespresso pods, and you put the pod in machine and outcomes a great coffee.
(25:22) Now why is that example spectacular? Because number one, the first business model they started with didn’t really work and if you take that industry, it’s a transactional industry of selling. Selling is not as good as having a lock in effect with the consumable that you have to come back and get from them okay. So there, the business model design is spectacularly different.
(25:51) The business model of selling produces some profit. A business model where you lock in customers and you have consumables, makes 20, 30, 40 times more profit. So even the design of the business model is different. Think of it from a medical device. You can sell a medical device, that might be a $2 million business. Or you can create a medical device with a consumable - a better business model design and all of a sudden you have a $20 million profit okay. So already the design you can crash test.
(26:22) Now, after you’ve crash tested your design that’s where you get into customer development. Steve Blank, Eric Reese mode, where you test those ideas in the market.
(26:33) So, oh I have this great design, now I’m going to immediately test it with potential customers and I’m going to see, oh this didn’t work. Okay, back to square one.
(26:43) But at least you know, we didn’t invest time and energy in refining an idea that we have no idea that it’s going to work. So you have these two phases, design and search, and you are going to go back and forth between designing your ideas, a business model value of propositions. Then search, you’re going to test it in the market and then you are going to see that it doesn’t work and then back to design.
(27:05) And then once you get more and more evidence, okay now I’m on the right path, then you switch to execution mode and then you are going to scale your idea. That’s when you invest the big bucks.
(27:15) So this phase, this crash test phase is exactly the one that we’re not doing yet in large companies. Start-ups have adopted it faster. VC’s Venture Capitalists are adopting it as well, so many VC’s today, they tell you okay, show me a business model canvas and show me the evidence that you have and the elements in your business model canvas are going to work. So again you need both, you need the business model canvas as the tool that’s shaping your idea and you need customer development when start-up principles that prove your ideas are going to work.
(27:52) That’s a very different way of doing things, and we believe in our company is that we can support this process with computer aided design for strategists and innovators.
(28:03) Imagine if we can work more like architects and engineers, and support that messy phase with software. You know, I’m not trying to sell the tools that we have, somebody is going to do it. If we don’t succeed with that computer aided design, somebody else is going to do it. Maybe the guys in silicon valley are faster than us guys in Switzerland; somebody is going to do it.
(28:24) At one point, strategist and innovators are going to have computer-based tools that are going to support them, just like architects have tools. You still need the brilliance of an architect, the creativity of an architect to make a great building, okay. It’s not the software that’s going to create a great building, but you leverage. Frank Barry, make a Frank Barry building without computer aided design and you are never going to go in that building because it will collapse.
(28:50) Michael, I’m amazed as I’m listening to Alex that a tool doesn’t exist already.
(28:55) Well the business model canvas is so simple.
(28:59) Well you say it’s simple…
(29:01) On the surface.
(29:03) Well maybe Alex can validate whether it’s product managers that are building the products requirement document and go to market, or the executive sponsor and all of these various stakeholders that bring a product solution to market. How well versed are they in terms of the nine building blocks that you define the business model around and even if they are, to go through this process, how can you do it without a tool?
(29:28) It’s an interesting point because Alex, a lot of people who come on CXOTalk are innovators and trying to drive business transformation of one type and another. And very often they are large companies, and today, a lot of it has to do with digital transformation and these companies are having a hard time.
(29:50) So maybe you can speak a little more about business model change inside large organizations, but relatively short because we also want to talk about the value propositions which is intimately connected, and we can continue this conversation for hours, but we have about another 15 minutes and we don’t want to run out of time.
(30:12) Yeah, so let me connect that back with the question before, so why don’t these tools exist yet. Well, because we’re not taught these tools at business school. So in large companies you know, people…
(30:49) Look at the education we have at business school. We get great education around finance. We get great education around marketing. We get pretty good education around accounting. Those are the operational things, so there we have tools.
(30:45) The problem is now we are getting into a higher level of abstraction - what is a business model? So until recently, rethinking your business model was not as important because business models didn’t expire as quickly, right. It’s only recently that these business models expire much faster like with Nokia and so on.
(31:06) And until recently, kind of the big success cases were ad hoc without tools. So what these tools lets you bring to the table is leverage a process that we were already doing, but in a better way.
(31:21) I often ask, because the tool is simple to start with the business model canvas, it can be used in complex ways. But the first time I talked in front of senior executives, I thought they were going to throw me out of the room that they should know their business model. Actually, the contrary happened they say, wow, I can map this on one page right.
(31:43) And it’s more important today to change your business model than to just to change the product, the pain on products. That’s why this is becoming more important right.
(31:54) Now this is something that has taken off in recent years because more people are struggling with that fact, that they should be inventing new business models, though the old ones are expiring. Again, I mean the example of Kodak, I think is pretty mind-boggling, right.
(32:20) It’s not that they had a lack of innovation capabilities. You know, Kodak helped invent the digital camera, right. They were not innovative – they weren’t, but because they were incapable of innovating the business model at this same time, they almost dig their own grave.
(32:40) If you compare that to Fuji film which is just a kind of large advertising in the financial Times where Fuji film was showing how they transformed. You have the picture of here you have a company that went bankrupt because they were incapable of reinventing themselves. Here, you have a company that is thriving and they are doing really well, because they were able to reinvent themselves.
(33:08) They didn’t use the business model canvas so they succeeded, so I would ask those people and I ask successful entrepreneur was as well, you succeeded, you didn’t have any tools. Why are you still interested in the business model canvas and customer development. They did it without, until now we didn’t have these.
(33:26) All of them say the same thing, they say, it took me a lot of failure. It was very painful, and I could have done this in a much more efficient way. So the number of times we hear, you know man, why didn’t you come up with these tools 20 years ago when I built my company.
(33:43) That’s because people are not doing something differently, in the sense that it’s the same task, but now number one the task is more important. You need to reinvent yourselves more urgently, because business models expire. Number two, now we have the tools and we don’t need to accept these big failures anymore.
(34:06) You’re probably know Better Place, the start-up around electric vehicle is that went through $850 million, is that because these guys were stupid? Absolutely not, I mean Shai Agassi, the head of this company is one of the most experienced business leaders in the world, who was at SAP and is going to become the CEO.
(34:31) But CEO’s are execution officers. They’re not the best equipped to create, to build new businesses. In particular if they apply the logic of execution, executing existing business models to new ideas. So what Betterplace and didn’t do and we are seeing the same phenomena in most large companies today is – so I’m connecting long windingly back to your question, is that chief execution officers, apply the principles of execution to the search of new business models.
(35:06) They want business plans, they want predictions rather than experiments, okay. So, that doesn’t work and that’s why Betterplace went out of business, because they didn’t test their value propositions. They didn’t test their business model. They had a great business plan, they sold that business plan to investors and then they started executing.
(35:28) Inventingthe future is not execution, it’s search. So what we need to create – I’ll be a bit provocative here. This is an idea that comes out of conversations with Steve Blank, today in large companies, besides the chief execution officer, at the same level just under the board we need a second job title at exactly the same level, and that’s the chief corporate entrepreneur.
(35:55) The chief corporate entrepreneur invents the future of the company, the chief executive - we’ll call it the chief execution officer, runs the existing business. Now you can imagine why this is not happening today, because imagine that, this needs to be a partnership.
(36:14) This person is building the future, this person here is financing the future. They need to get along. This person can’t build the future without the funds from the execution machine. Today, we don’t have this because these guys here say, these are innovation pirates -no it should be a partnership, see what I mean?
(36:33) So the chief corporate entrepreneur I think is the title that we need to create. So I hope that board members of large companies like HP, like Dell, what they need to insist on is to create the chief corporate entrepreneur, whose at the same level as the chief execution officer -provocatively call it like that, and that’s what I think large companies need to change.
(36:57) Are the exceptions to that like Marc Benioff from salesforce.
(37:02) I can’t talk about that much about Salesforce. They’re company I admire, but I don’t follow that much. But again, sorry to come back to Apple and Amazon were examples of continuous business model innovators. So everybody thinks of Apple as the product innovation company. What they don’t realise, at least under the late Steve Jobs, they were continuously reinventing the business model.
(37:33) When Steve Jobs introduced the iPod, he started locking us in. That’s a business model innovation because he created switching costs. It became hard for us to change our MP3 players, because we were locked in. That was the basis of a continuous business model innovation.
(37:51) When they launched the iPad, they disrupted their laptop business deliberately. When they launched the iPhone, they knew they were killing the iPod. That is proactive reinvention.
(38:08) Most companies I see today, they don’t proactively reinvent themselves, they wait for a crisis, and when a crisis comes it is usually too late, okay, Kodak, Nokia it’s too late. So it’s not when am I going to start a business innovation, its where is the business model innovation happening in my company today.
(38:26) The second example I mentioned, Amazon, the number of business models they are running today is spectacular. Now you could say, oh, they’re not very focused. It’s not true because if you analyze e-commerce, you analyze their infrastructures business and you analyze their Amazon Web services, they all rely on the same backstage.
(38:49) It’s an incredibly smart strategy that they are diversified in higher margin businesses, while building on the business models that they are already running, which are financially actually less interesting.
(39:03) Amazon Web services have much higher margins than e-commerce businesses, but one is built on the other. So those are great examples and it’s not a surprise that they are entrepreneurs. Remember the concept of the chief corporate entrepreneur, it’s not surprising that companies run by entrepreneurs are able to reinvent themselves.
(39:22) But it’s not enough, if you take Dell, they had a great business model but they couldn’t reinvent themselves, so it’s not enough. There are a lot of factors, it’s a hard thing to do.
(39:34) So we have just like five minutes left so let’s talk about value propositions. You’re coming out with a new book called value proposition design. Why did you write that book and what’s the connection to business models, and speak really fast so that we can compress half an hour down into five minutes.
(39:54) We need to schedule 2 hours.
(39:56) Next time you’ll come back, so value propositions.
(40:00) I’ll speak slower…
(40:01) You’re awesome, I want another 45 minutes so I can learn from you, but go ahead.
(40:07) So again, let me use the analogy of the surgeon that we started out on. A surgeon doesn’t have one tool to perform every kind of surgery, right. Even for one heart surgery, a surgeon is going to use several tools. We use some more than others, but we need a series of tools.
(40:24) And the same you know in business success some people say, yeah, we want to add this block and that block to the business model canvas, and then you end up with a Swiss Army knife. A tool that doesn’t do any job well.it does a lot of jobs but not well.
(40:38) The business model canvas allows you to describe how you are creating value for your company, right. How you are going to make money, a blueprint of your strategy. Don’t use that to describe how you are creating value for your customer.
(40:53)So we created another tool you know, for a kind of issue that is a bit closer to what people do today. Less disruptive, nevertheless powerful tool. We live in a product based world still, people are not yet very focused on business models. They are more focused on creating great value for propositions around products.
(41:14) But there is no I think good tool out there that allows you a very concrete way, tangible way to visualize, how are your products and services creating value for your customers.
If you go into most companies, they have a lot of great product ideas and they have a lot of great future ideas, but ask them and get them to articulate how concretely are they creating value for their customers.
(41:43) Even many product managers today was speaking at a product management conference, product managers can always articulate that they work well. So we created a tool that allows you to zoom into the business model canvas, into two boxes. The value for proposition and the customer segment targets and we created a map of those two boxes, and literally it is like zooming in at the lower level of irregularity.
(42:09) Now you have a map that describes your products and services, creating value for your customers. So we came up with the simple concept of sketch out your first step. What jobs are they trying to get done, what are their pains and what are their gains?
(42:21) It’s again a map, and with that map you can do better with what people are already doing. You can make your customer research more actionable. You ask yourself, what are your customers trying to get done. What is painful for them and what is the obstacles that is holding them back from doing this stuff well that they want to do. What kind of gains are they expecting, how do they measure success.
(42:43) Once you understand that picture really well, now you can say okay, here is my product and services. Now I can connect it back to the customer with saying this is how I’m relieving pains, so you are going to connect your products and services to the jobs, pains and gains that you mapped out here. This is how I’m creating gains for your customers, so all you are doing now is making explicit, how you are creating value for your customers.
(43:09) Again, it’s this idea of visualizing of mapping. Why is this important? Because today, we don’t have a very good way in most companies to explicitly articulate how we are creating value for our customers. What does that mean? It means that product teams, marketing teams, and finance teams don’t understand each other because we don’t have a shared language.
(43:31) When we made the marketing communications, well, if I made explicit on what pain relievers and gain creators I’m focusing on, the whole company knows this is what we are doing. We’re not working on all of the customers jobs, pains and gains - no, we made a design choice. This is what we are doing, this is what we are not doing and again, and you are making things explicit.
(43:54) I think I like making this analogy back to information technology. A team that is going to sketch out you know, server infrastructure, database infrastructure, would never work without visual tools because it’s too complex. You need to make these things explicit so that everybody that works in the same direction. We understand the architecture, we understand what we are doing.
(44:18) Why don’t we do the same thing in business, why don’t we have visual tools that allows us to work in the same direction just like we do with the more operational things like databases. I think we are going to get there again, so the reason why we came up with the value proposition for design in the new book, because we believe this fuzzy space of the value for propositions - what does this even mean, right.
(44:41) We want to create a shared language and a tool that allows you to manipulate the value for propositions as if it was a concrete object. So we created an object to manipulate the business model space, now we have created one over here.
(44:55) I think we’ll have many of these tools may be we will write another book. Hopefully other people will do it for other issues that you need for success. Organizational culture, I mentioned a couple of times, how fuzzy is that issue. I believe we can have tools to turn organizational culture into something tangible that we can manipulate.
(45:15) It seems a little bit abstract right, but it just means that we are going to make all of these strategic things more tangible so that we can really work with and it doesn’t stay this kind of fuzzy thing, we can compute a design.
(45:30) So you know, this is what an innovator thinks, is almost crazy if you want, the crazy inventor. But somebody is going to do it, and I think in 5 to 10 years this is the new normal, this is the profession of the strategist and innovator that is going to be completely normal to use these kind of tools.
(45:46) Alex, this tool where does it sit, is it in a CRM solution that has social technologies that allow these stakeholders to collaborate, is it a standalone tool that is already integrated with your email? Where does this capability sit in the enterprise?
(46:10) Sometimes when we adopt the Silicon Valley spirit, even as a Swiss company we say we are going to become the SAP of strategy. So it becomes an operational tool that everybody is going to use, because we want to understand what’s the value for proposition, it’s built on top of which business model. Who is responsible for all of these things in the business model, so is going to be a very social tool that everybody can link into.
(46:38) You know, today I think everybody in a company is responsible for the business model and for the value of propositions.
(46:46) A product manager over here can’t build a great product if they don’t understand the business model over here, because all of the pieces are connected. So, anybody in the company is going to understand what’s the strategy, what are the value for propositions, what are the business models and contribute to that, so we all work into the same direction.
(47:05) So yes, it’s a very social system. It’s an enterprise system just like we have enterprise resource planning on the operational level. I think we are going to have something like you know, strategic resource planning for the more strategic level. And it’s going to be normal and indispensable, so I think those kind of tools are going to replace the broken strategic planning process. Ask anybody you know tomorrow, what do you know about strategic planning is it broken? You won’t hear one person who says strategic planning is still creating value today, yet we do it again and again.
(47:40) Imagine if that was a living, active you know tool, where you don’t just present once a quarter or once a year. But everybody knows how the strategy is evolving. Everybody knows where the improvement projects contributing to the business model. Everybody knows what other new business models that we are exploring, but that’s kind of the vision what we are working and I think everybody is going to be involved in it.
(48:06) I asked that question because we see key activities in key resources, that’s two out of the nine building blocks and any business model will require activities across lines of business and various stakeholders with various skill sets and disciplines. So it would have to be a living, social empathy for everyone to be on the same page, on the same canvas.
(48:27) And if it’s not your talking to yourself.
(48:29) Yeah, how you measure success and where you are. I love the fact of the potential reporting that can come from the system that allows all of us to have – Michael, you have written thousands of blogs about IT failures, because you have various stakeholders in various lines of business and they all have a different picture of how well a project is doing. And to be able to have that visibility would be incredible, and again I go back I can’t believe it doesn’t exist.
(48:58) Well we are going to have to ask you to come back so that we can talk about – well, there is so much more we can ask you, that we can discuss but our time is up.
(49:06) And I apologize that we didn’t ask you any of the questions that we felt we were going to ask you.
(49:10) We sent you all these questions, but next time we’ll asked the questions that we sent you in advance. Actually, if we said that we would lie.
(49:21) It was a real pleasure, I mean I get excited about this stuff, so I go on talking but I think this is a big you know topic about companies. If the large companies, and if they want to survive, they are going to have to drastically change and we’re going to see big waves of management innovation, that today a lot of large companies are going to disappear because they’re going to be disrupted. But those disrupters are also going to be disrupted if they don’t start understand that you know, like Amazon, pretty amazing right. A lot of things that are not right about Amazon, but what they are doing well is that they are continuous reinvention and I think that’s going to be the new normal.
(50:01) As Steve Blank likes to say, well we are in the age of the disposable company. They execute one business model well and then they disappear. So we’re going to have these two classes of company, the disposable one that’s going to get big and they’re going to disappear. A little bit like the hits in music right. One-time hit, there you go.
Then you have some very few that can reinvent themselves.
(50:23) Well on that we have to thank Alex Osterwalder, who is the real expert on business models and has written one book, the definitive book on business models with the business model canvas. And is now working on a book related to value propositions. This has been show number 78.
(50:48) Let me be a little bit un-Swiss and do a sales pitch, is coming out in October 20th and you can actually pre-ordered it and you can get 100 pages for free online. Just Google, value for propositions on design, go to Strategyzer, , it’s the premium model, you have got to innovate the business model to get - you get a lot of it for free so have a look and decide on your own if these tools are valuable for your organisation.
(51:13) Everyone in my marketing group will get the book Alex. I really look forward to it. Thank you very much.
(51:17) It’s coming out on October 20, Google value proposition design and take a look. Vala, as always it’s a pleasure.
(51:25) Unbelievable show Michael, thanks well done.
(51:27) Alex Osterwalder thank you so much and we’d like to thank everybody for watching and we’ll see you next time.
(51:33) Thanks for having me.
(51:35) Bye bye.
Published Date: Sep 12, 2014
Author: Michael Krigsman
Episode ID: 78