Lightning Edition:
Innovation and Business Models
Business models are the foundation of successful innovation for both startups and large organizations.
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Business models are the foundation of successful innovation for both startups and large organizations. In this special edition of CXOTalk, we ask Dr. Alexander Osterwalder a series of rapid-fire questions on topics related to business models, transformation, and innovation.
Alex is author of the international bestseller Business Model Generation and 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 also wrote the the book Value Proposition Design.
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Michael:
(00:02) Business models, innovation, value propositions. It’s the stuff of life if you are a start-up or if you’re a large organization focused on innovation and trying to figure out new ways to evolve your business, especially in this world that’s becoming increasingly digital.
And today on episode 112 of CXO-Talk, we’re thrilled to welcome Alex Osterwalder, who in my mind is the business model king of the world. And I’m Michael Krigsman and I’m here with my co-host, Vala Afshar. Hey Vala!
Vala:
(00:44) Michael how are you? I agree with you 1000%, we’re honored to have truly an innovation business model, world renowned expert, bestselling author, Alex on our show welcome Alex.
Alex:
(00:58)My pleasure to be with you guys, thanks for inviting me.
Michael:
(01:02) So today we are trying a new type of CXO-Talk format, which is we’re going to ask Alex a series of questions and Vala and I are pretty much going to be quite for most of this, which I know Vala, for you and I that’s tough.
Vala:
(01:24) Especially for one of us.
Michael:
(01:28) Alright, we’re going to have to talk about this later. So Vala and I are pretty much going to be quiet for most of this, and we’re then going to take Alex’s answers and create short videos. So Alex you as the business model king, you do a lot of experiments don’t you?
Alex:
(01:48) Oh absolutely, I think you can’t innovate without experimenting so it’s part of the job.
Michael:
(01:54) Alright and so know we’re going to do an experiment in CXO-Talk media, how that?
Alex:
(02:01)Sounds great.
Michael:
(02:03) Okay, so Vala do you want to kick it off with the questions.
Vala:
(02:07) Well before we start, Alex if you don’t mind briefly give us a little bit about your background and of course your CEO Strategyzer talk to us about Strategyzer and your focus in terms of what you consult.
Alex:
(02:20)So, basically I’m best known for being the lead author of Business Model Generation. It’s a book about business models around this approach called the Business Model Canvas that helps you know, new ventures and large companies to think about business models and reinvent themselves.
(02:36)Based on that book and that methodology we started a software company that helps companies reinvent themselves. So our kind of vision of this is that we want to create the SAP of strategy if you want. You know, we have tools and software for operations, I think we do that pretty well in the world, but when it comes to strategy and innovation I think we can get a lot better in terms of the tools, processes and software that we’ve use. And that’s kind of where we’re trying to go with my team and myself.
(03:07) And I think it’s an exciting journey because I think it’s a very relevant topic you know, business model innovation, new value propositions because business models expire like yogurt in the fridge like they say. It’s a competitive world out there, so there is no stopping anymore. Everybody has to reinvent themselves.
Michael:
(03:03) And you’ve written a book called Value Proposition Design as an extension to Business Model Generation and the Business Model Canvas, and Value Proposition Design really talks about product market fit But between the two books, between the Business Model Canvas tool that you developed in your first book, and Value Proposition Design your work is underlying much of what’s going on today in the business world regarding business models and business model change.
Alex:
(04:00) Yet we learned a lot since be published the first book and I think one of the big learnings is and we believe in that for quite some time now is you know, if you want to seriously reinvent yourself you need to have the best tools, the best in class. And that’s a series of tools, there’s no one thing here that can give you all the tools.
(04:18) So we tried to do with our first two books and by using books by other inkers and practitioners, we tried to integrate all of these methodologies and make it practical for people in companies for people starting new ventures to apply this stuff.
(04:33)So I think the real vision behind this is well, what if we had a tool box and we just put the best tools out there, independently of who made them. You know is it a consulting firm, is it a Harvard business School professor, or is it our company. We really want to help companies innovate with the best tools, and those two books that we brought out addressed to topics that we think are you know top of their list of the executives which is business models and value propositions.
(05:01) But I think there will be many more tools coming from many more people.
Vala:
(05:06) Let’s start by you defining what is a business model?
Alex:
(05:12)There is a very simple answer to the question, what a business model is. I would say it’s the blueprint of your strategy. So your strategy tells you where you want to go and the business model tells you how you are going to do that. And it’s basically a description, and we like to make it a visual description of how you create, deliver, and capture value.
Michael:
(05:33) What are the components of a business model?
Alex:
(05:36)So we created the Business Model Canvas very pragmatic and visual business tool that allows you to address nine important questions to describe the business model. With that it starts with the customer segment; who are you targeting? And then you ask yourself, what sort of value am I creating, so you are going to describe the value propositions. Then you asked, well how am I reaching this market? You are going to describe the channels to reach those customers.
(06:00)Once you’re in business with them the next block is well, what kind of relationship and I going to establish? Is it transactional, is it long term? Then of course when you know who you’re targeting, what you’re delivering, and how you’re delivering, you need to ask well, what are these customers willing to pay for it? So you are going to talk about the revenue streams.
(06:17) we like to call this first five components the front stage of how you are creating value. Then comes the backstage, you’re going to ask yourself, okay I know who I’m targeting and what I’m delivering, how am I going to do it? So you talk about the key resources, assets, and factories, and brand and so on. How are you going to do it, and of course key partner, who are you going to work with to do that? And that basically gives you the cost structure. So at the end if you answer these nine questions, you have the equation of how you are going to earn more money than you are spending.
(06: 51) You’re going to describe all the essential pieces to the blueprint of your strategy.
Vala:
(06:57) Alex, why our business model is so important?
Alex:
(07:01) Well you know, business models are per se not something you. Any organisation that created some kind of structure created some value and delivered that value has a business model. The reason is quite business models are a topic that has become so relevant these days is because business models expire much faster.
(07:20) 20 years ago, you could say I’m in this industry – I’m in the airline industry and everybody would know what you’re doing. Today you know, you tell somebody what industry you’re in, they won’t know what your business looks like; how does your business model work?
(07:34)So, let’s take the music industry. Apple was one company that started disrupting that, then came Spotify, and you had the record majors that are trying to figure out how to do things. So business models today, expire much faster than they ever did before and in one particular industry you’ll find multiple different business models.
(07:55)So understanding, what’s the right business model for my industry, for my area is increasingly important. And maybe just one more thing is that today you know if you ask, what business is Apple in, you can’t name in industry. They’re in software, they’re in hardware, they are in content. Basically it’s the business model that matters, not the industry any more. It’s what’s the blueprint of your strategy? That’s why business models start to matter because there are many more choices than before.
Michael:
(08:26) What is the Business Model Canvas and why did you develop it?
Alex:
(08:30) The Business Model Canvas is our way of visually representing business models with nine questions; nine building blocks. And the reason we came up with this together with Yves Pigneur, long time ago in a Ph.D. dissertation, we wanted to figure out at shared language, practical language that executives and entrepreneurs could use to describe their business model. And this was the result and it’s now tested with millions, literally millions of people and it helps them a lot to describe their business models, to collaborate on business models and to test business models.
Vala:
(09:07) Alex, how should one use the Business Model Canvas?
Alex:
(09:11) I think there is no one right way to use it, we did just recently a blog post on 14 ways to use the Business Model Canvas, because it’s such a broad tool that allows you to think about your business model. You can use it to manage your existing business model. You can use it to create new business models you can use it as a dashboard. So there are many different ways and we do now know in particular areas how you can use it, but overall you can use it in very many areas because any organisation who has a business model, so every kind of function you have in a business will have to deal with the business model in one way or another.
Michael:
(09:51) What is business model innovation, and why is it important?
Alex:
(09:54)Business model innovation is about reinventing yourself or rejuvenating your business model. The reason it’s important today is that many of the legacy business models expire, and it’s not just in technology. Take the pharmaceutical industry.
(10:09)Their business model of selling blockbuster drugs doesn’t work anymore, so they need to reinvent themselves. And the reason why it’s important today is because so many industries are facing this challenge. And the reason why we really pushed this topic of business models is because technology and innovation, great new products just not enough anymore. That just gives you the ticket to compete. What you really want is a great product, great technology, great value proposition in bed it in a powerful business model. It’s that combination that will give you, at least for some time a competitive advantage.
Vala:
(10:44) Can you describe to us the relationship between innovation and business model change?
Alex:
(10:50) Innovation is a very broad topic. You know, you can have process innovation. You can have product innovation, technology innovation – there is a very broad term.
(11:00) Business model innovation is one particular type of innovation, which is well how I creating, delivering, and capturing value? So it’s at a very strategic level and it’s so hard to do because it can you not be a fundamental change for an existing company.
(11:17) If you’re a pharmaceutical company that has done the same you know work the same way for decades, is very hard to change the entire business and the same in industry. IT you know, consumer goods, you have to change or maybe add a new kind of DNA to what you have been doing for the last decades – that’s very hard to do.
Michael:
(11:40) What does start-ups need to know about business models?
Alex:
(11:44) I think start-ups are large companies. Any company that is trying to build something new. The main thing here is to always admit that when you start out, uncertainty is at its maximum. You don’t know what’s going to work, in particular when you are trying something radically you know, and you need to admit that, which means you’re not going to execute an idea. You’re actually going to search for the right business models and the right value propositions to bring that idea to market. To turn that vision of what you think could be done into a strategic and complete blueprint.
(12:22)You need to admit you have no clue when you start out, but you systematically reduce this uncertainty with small experiments, and you increase the money you spend on experiments, tests, prototypes, until you have enough evidence to understand – this is going to work. And then you invest heavily, but you don’t invest heavily at the beginning which sounds you know like obvious but many companies still invest in ideas.
(12:48) Ideas don’t matter, is turning that idea into concrete value proposition and business models that you can prove with evidence that they are going to work. That’s the hard part, and then you execute it.
(12:59) the ideas don’t really matter at all.
Vala:
(13:03) What do large companies need to know about business model change?
Alex:
(13:08) What large companies really need to realise when they address this topic of the business model change, business model innovation is it’s not bad to have an existing business that makes money and you know it might be at the end of its life cycle, but you want to continue execute that.
(13:24) What they need to do is create an innovation space, which is in addition to what they already have, and in that space the rules are totally different. So what they need to realise is that incentives are different. Processes are different. The type of people you are going to need are different. So, you need to create that second space to be able to innovate and here’s the hard part.
(13:45)That second culture, that second space needs to be deeply integrated with the execution space – the execution engine as some like to call it. It needs to be a partnership, you need to have a dual culture that works hand-in-hand. That’s very tough to do.
Michael:
(14:02) What is some advice that you have for large companies who want to conduct business model innovation and therefore are operating to essentially two different business models under one roof at the same time.
Alex:
(14:20) I think even before they get there, the challenge is, well how you get new businesses with potentially different business models, not necessarily, how do you give them space to grow. Well, you want to give entrepreneurship some prestige and power in your company. That is not the case today, and there is a very simple reason. What gives you prestige in a large company? It’s the budget that you manage and it’s the number of people that you manage.
(14:45) Yet an entrepreneur, and innovator, business model innovator should never start with a huge team and a huge budget, because you will waste the money; you will blow it.
(14:54)You want to start small and increase that, but it means you need to give your innovators really a seat at the top table, and I like to be really provocative and say, hey, what if we created the Chief Corporate Entrepreneur, who has just as much power as the CEO and he or she reports to the board? You’re creating a space where people can innovate with real power to create the future for the company.
Vala:
(15:21) Alex I want to ask you a question about you can argue may be as the top buzzword in the tech industry and that is digital transformation. What is digital transformation?
Alex:
(15:35)Well there’s probably many definitions of that as people. I like to look at it as you know, well how are we going to use the new technologies today that exist to better value propositions and better business models. And not you know just focus on the digital aspects, but focus on the value propositions that we create, but focus on the business models that create value for the company.
(16:03) And using all the technologies and communications that’s out there, which is usually going to be a mix between old school and new school. Right, between the physical world and the digital world. The big challenge, you know if I just take my space that I focus on and digital transformation is well, how can we use digital technologies to create better value propositions that address jobs, pains, and gains that matter to customers.
(16:31) And how do we embed those value propositions in business models that allow my company to create value for my company, for the shareholders, for the employees. And create a certain competitive advantage.
(16:43) So digital transformation is a combination of innovation, value proposition, innovation business models, and innovation in processes. It’s the whole aspect of transforming on the basis of the digital tools that exist today.
Michael:
(17:00) I’d like to come back to digital transformation in a moment, but first let’s just pick up that thread on corporate innovation. And what advice do you have for large companies that want to work with start-ups and use start-ups as an external source of innovation for themselves.
Alex:
(17:26) Probably not an area that I have that much expertise in, because what I’ve seen very often is that large companies kind of use start-ups almost sucked the life out of them, because they require a lot of time, a lot of energy, and then sometimes don’t even help these start-ups to survive. So I think the just some of the important things that need to be done in this space is when you work up with start-ups understand that they are kind of ambitions, their goals are very different from you as a large company. And adapt the way that you collaborate with the way they need to survive in the markets.
(18:11)So, you really need to build a partnership in the sense that, hey respect this is a company that might work with us, might not work with us but we can’t you know, take too much of their bandwidth. Or if we do do that we need to actually you know really finance them in a deep and financial way.
(18:31)What I think is important to understand is it is one of the options of innovating to work with start-ups. You can build, you can help build, you can acquire, there is a whole kind of way that you can do. But one thing that is very important is to understand the culture of a start-up, of moving extremely fast, changing very fast. Of one week they say they are going to do this, next week they might have to move in another direction because the market tells them they were wrong a week ago. That’s very hard for large companies to understand.
(19:04) There is much more speed, it’s unpredictable when it’s uncertain you are probably going to change very quickly a lot until you have the evidence in which direction you need to go.
(19:14)So you need to develop the mindset of collaborating with a start-up. Again, it is a very big cultural difference from the execution engines that we have in large companies today.
Vala:
(19:25) Alex, going back to the topic of digital transformation why does transformation – digital or otherwise often require business model change.
Alex:
(19:37)Because a lot of the things that are possible today require very different processes, very different ways of working. You can do things today that you couldn’t do five years or maybe a decade ago. And in large organizations, you know you tried to make standardized industrialized processes. And that’s very good, you know what they are supposed to be rigid to a certain point because you know what works. You want to make that leaner, faster, better and cut the cost out of it.
(20:13)The problem is, when the world changes and new choices become possible you might to think of creating totally new processes. To create new types of value propositions. And change doesn’t come easily to anybody, right. So the difficulty is, in addition to this execution engine that you built – which is very good, you need to be lean and cut costs to produce efficiently.
(20:38) In addition to that you need to open up and say okay, well some things are new, some things are different what if we experimented in that space and experimentation is never lean. Experimentation always requires a culture where you can fail, where failure is a good thing to do because you are going to learn and you’re going to change.
(20:58) So again, it comes back to these two different cultures, that’s why it’s so hard because when you do new things to experiment and when you create new processes it might be very different to what you’ve done before and those processes are in process hand books, right. Those are almost cast in stone.
Michael:
(21:16) You mentioned the term value proposition. What is a value proposition?
Alex:
(21:21)Basically the value proposition is the story of how you are addressing jobs, pains, and gains that matter to the customers. Your value proposition describes how your products and services, or how you intend you know to create value for your customer with your products and services.
(21:40) It’s never your products and services alone, it’s how they address the things that matter to your customers.. So it’s the story of how your helping you’re customer succeed.
Vala:
(21:51) What is the difference between value proposition and a business model?
Alex:
(21:59)So the business model is the big picture. The business model describes how you are creating value for your company. Right, because the business model helps you describe you know what’s the strategic blueprint to create a profit for your company.
(22:14)The value proposition has a very different focus. It describes how you are creating value for your customer. And a company that wants to succeed needs to succeed in both and a detailed picture focused on a customer – how do I creating value for my customer. And then in the bigger picture of how is that value proposition going to be embedded in the business model to create this value for me.
(22:36)Now some people like to say, well the value proposition is the most important. Well I wouldn’t say so because, you know that there are multiple examples out there were companies had great value propositions and still went bankrupt.
(22:50) Kodak invented or helped invented the digital camera. People love digital cameras. It didn’t prevent Kodak from going bankrupt, why? Because they didn’t have the business model for digital cameras, so you need to succeed in both, in how you are creating value for your customer, and how you are creating value for your business. It seems obvious, but what’s different today is that we have tools to reflect on those two things.
Michael:
(23:18) What is product market fit.
Alex:
(23:22) Product market fit is basically when you get traction with your value proposition. So, you might have something great on paper that you came up with in your meeting room, looks like a brilliant idea because your best marketers, your best engineers you know came up with it and it just seems obvious that this is going to work. But that’s just a concept. That’s just a prototype of how you think, and how you intend to create value.
(23:47) Then you go out and test it and you are probably going to be wrong because you know nobody knows customers as much as customers know themselves. So basically when you go and start and test these things, you will be wrong at the beginning and you’ll change your value proposition until customers get excited – until you’ve nailed it. And when you’ve got it right that’s when your value proposition gets traction.
(24: 13) When your value proposition gets traction, that’s when you have product market share. So it’s basically this journey from taking an idea, conceptualizing it in a value proposition, testing it until I have the right fit between my products and services and the jobs, pains and gains that my customers have.
Vala:
(24:35) Can you talk to us a little bit about Value Proposition Canvas and how that works?
Alex:
(24:42)So the Value Proposition Canvas is a zoom into two blocks of the business model canvas. It takes the customers and it takes your value proposition and why to pieces? Well basically you want to understand your customer right. So what if we had a map to describe our customers.
(25:01)So we came up with this customer profile, very simple map with three components to better describe and understand, study customers map customers in an actionable way. So the three components. The jobs that are trying to get done, the tasks they are trying to fulfil. Then the panes that they have, anything that annoys them, that holds them back from doing a job well. And the gains that they are trying to get to materialize.
(25:31)When you can describe the jobs, pains, and gains from your customers that’s when you really start understanding them in a very actionable way. Then you ask yourself, okay, what are my products and services that I want to offer? That’s pretty easy to do so we are looking at the value propositions.
(25:50) But then what you really want to do is make it explicit how your products and services address some of those jobs, pains, and gains. So how do my products and services help alleviate my customers pains (that’s what we call pain relievers).
(26:07) Then how do my products and services help my customers materialize some of those gains that the aim to achieve, right. So, when you have this map to describe your customer and to describe how your products and services are creating value, that’s when you can have you know, you can shape your ideas, you can have great conversations and you can track also that understanding.
(26:33) So again like with the Business Model Canvas, created a map to make this topic that was really fuzzy more tangible. When you ask somebody, what’s value proposition, you’ll get 20 answers. But if you have a map to describe value propositions, you’ve created a shared language. That was our goal, what’s the map to describe value propositions with a shared language, so we can better design, challenge, test, and then build value propositions.
Michael:
(27:04) What is the steps to creating a new value proposition?
Alex: (27:09) So the steps to creating a new value proposition, and the steps to creating a new business model are very similar. Basically, it’s the journey from going from idea to a real business -something tangible, right. So, you first design some conceptual prototypes, how can my value proposition look like. So it’s this whole idea of prototyping, looking at alternatives, and asking what could be.
(27:34) And then the next step is immediately, how do I test my value proposition? So on paper it looks great, now let me test it with the market, because customers are ultimately your judge, jury, and executioner so you immediately want to test.
(27:49) You test it and you’re going to find out you were wrong, you go back to designing it it sent iterative process, and you go through this iterative process until you have enough evidence that you are going to succeed.
(27:59) Now the only difference between without creating great value propositions is in bringing them to market and creating great business models and bringing them to market is when you are focusing on the value proposition and you probably have an additional task of getting the business model right. So one never works without the other. And you need to embed great value proposition within a great business model.
Vala:
(28:26) How can you pivot business models and value propositions quickly to find the right approach?
Alex:
(28:35) I think it’s a very interesting question and how you pivot value propositions and people often think that they need to build something. You know if they are thinking of an IT service then they need to build the IT service. Well that’s absolutely not true, that comes maybe in a later stage because building stuff in a software world you know is cheaper than ever before but it still costs quite a bit of money.
(28:58)The first thing you want to do is just conceptionally map it out and then asked yourself, what needs to be true for my idea to work. And those are your hypothesis. So you ask yourself, what are all the things that need to be true for idea to work after you have kind of mapped out your value proposition that you want to build.
(29:18) And then you test one after the other, and that can be as simple as launching a Google ad campaign. You didn’t build anything yet, you’re just figuring out. If people will click on an ad you know about a type of new this or that, a new headache pill or you will launch a Google ad around this specific problem, and you will learn if people have that problem or not.
(29:42)If nobody clicks on and add, well that problem doesn’t probably exist. So you can test a lot of things and pivot your idea way before you build anything. So there is this myth of having to build something around to test it. In particular, in the health sector, people will tell you that it is very expensive to build a prototype. You know in biotech it’s very expensive to come up with something new.
(30:07) You can pivot a lot before, you can test ideas a lot before you just need to address always this question, what’s the most important thing that needs to be true for my idea to work and that’s the first thing you will test. Then you will continue testing those important hypothesis.
Michael:
(30:24) Can people in large companies test and pivot business models and value propositions?
Alex:
(30:32) Sure I mean start-up or large company the task is the same thing. You want to reduce uncertainty, you want to de-risk innovation, so you have to do it if you don’t want to make what some academics like to call wild ass gambles on new innovations.
(30:40)The challenge of course in large companies is that you have rigid processes that were not designed for experimentation. So it’s much harder to do this kind of experiments because the processes don’t exist. The incentives don’t exist, experiment fail and learn, so you have to put that in place. But I can tell you this that we are seeing in many many companies, that GE even launched a whole programme called FastWorks together with Eric Reece to do this and DeBlanc has also worked with that at GE. So large companies are trying to do this now. It’s very tough for them to get these processes going, but they know if they don’t do it for them, innovation will remain extremely risky and able basically burn a pile of cash.
(31:41) So if they want to reduce the risk of innovation, they need to do the same thing as start-ups do today which is experiment, learn, and pivot or iterate very quickly. And they are trying very hard, I know a lot of companies that are doing that now.
Vala:
I think you may have answered this question, how can large companies view start-ups as an external source of innovation?
Alex:
(32:08)So sometimes there are things you can do it internally because of the culture, because of the processes or because of the brand for example. So I do think you know it does make sense for large companies to sometimes say, well what if we use an external entity and gave them you know the entire freedom, invest maybe in them and then potentially acquire them.
(32:34)The one problem with that approach is that the start-up might lose some of the things that the large company could normally offer which is brand, which is access to its sales force. So working with start-ups is really good if you can also help them benefit from some of the assets that you have, and I don’t just mean money I mean sales force, I mean brand, IP and so on.
(33:04) So you know turning it into more of a partnership where you can give them some of your strengths to leverage you know where they are starting out, that’s when you get the best kind of results.
Vala:
(33:16) Alex, we have a question from Twitter regarding value proposition, and the question is, is value proposition design down the chain or up the chain?
Alex:
(33:29)So it really depends on the objective that you have. It’s very legitimate to say you know, I’m just going to focus on value propositions within my existing business models. So if you are a company that has had to invest millions into a platform infrastructure, then you are probably want to increase the return on that investment and say, what are other value propositions that I could create based on that existing platform.
(33:58) Now, it can also be very different where you know your business model today has expired and you are going to create an entirely – you need to look for entirely new business models, so where value propositions you know have the right to be embedded in totally different business models. So it really depends on the objective where such an innovation project is going to live within a company. You can improve your existing business model and new value propositions. Or you can build new value propositions that require totally different business models.
(34:36) But see those two things will require very different environments., because if you are starting to question the business model, you’re playing a different ballgame. You need to create a space where you need to allow the business model. So depending on what the objective is, you will find the value propositions design in one part of the company or another.
Vala:
(34:58) Alex, last week we had Tim O’Reilly who as you know is the CEO of Riley Media and he’s a basketball fan like yourself and he said at one time and you know, the team with the best players and analogous to today companies with the best most data. You talk about company like Uber, was their business model built around transportation or were they a data company, and today that 50 billion valuation and they are richer than 50% of the SNP500. So talk to us about this massive acceleration and innovation in the in the mobile, social, cloud, big data, Internet of things and how that can radically change your business model.
Alex:
(35:46)So I think there are many amazing trend is going on and there are many different technologies innovations that you can use to create entirely new business models. And I think what we have seen in the recent years which you know, led to some of these crazy evaluations, you know can discuss if they are too big or not but is the scalability of these companies.
(36:11)So if we take Uber as an example, I mean what’s amazing is they have relatively little physical assets. You know you take a taxi company as a comparison, the business model is night and day. Where they actually get others to do the work in their business model and the use other companies or other people’s assets.
(36:35)So what that business model does is it intelligently, leverages the work of others and the assets of others. So some of these business models which have huge evaluations do that really well. Take Facebook, now, why is Facebook so valuable? Well because they have a changing content every day. People don’t come to Facebook for the platform, they come for the content of their so called friends. But you know, who creates that content? Well, it’s the free workforce of over 1.4 billion people today.
(37:09)So, again it’s a business model that leverages other people’s work, other people’s assets and does that extremely well. So that then (interference in the sound?) Huge pool of data, but you know the content itself is very valuable not just how people you know navigate and behaves so you can sell advertising. But the content itself that was created for free, is a huge part of the business model
(37:35)So what these companies do is they have they are very scalable. I know I get I get along with my answers, I get excited about this stuff.
Michael:
(37:47) Know it’s great, we’ve actually asked the questions that we wanted for our special lightning round and now we are just chatting business models. I have a question for you, so you said Facebook is relying on this pool of free labor and you said Uber is making money but it doesn’t own all of the vehicles. do we need to consider the issue of fairness in this does that come into play.
Alex:
(38:21) Well I wouldn’t say so in the sense that consumers and users always have a choice. So of course we can always discuss about ethics and fairness and I know Uber in particular there has been in discussion all the time. But no, at the end of the day it’s consumer behaviour that decides if the business is going to work or not. So if consumers are fine with the service and they say, you know I don’t care if my data is used here or there, you know it’s their choice.
(38:50) Where I do think you know we need to talk about fairness and ethics is when a company is not transparent about how they are doing certain things. I think that harder and harder to do in today’s world, because you know information flows so quickly. So it’s actually the fairness today is happening by consumers voting with their feet and consumers distributing information about you know companies that behave badly.
(39:16) Apple probably wouldn’t have change their logistics if consumers hasn’t started to you know say, hey this isn’t fair to workers in Asia, so I think it is at the end of the day really the consumers that decides. You know even when customers get locked in they can always leave. It’s always the consumers choice, so I do think the fairness come from how you know the consumers decide what’s fair and what isn’t.
Vala:
(39:50) Well you know watching the CEO of airBnB and Code con at Ricco’s conference yesterday they talked about they are approaching 1 million visitors a day. They don’t hold any real estate, YouTube doesn’t own video Alibaba doesn’t have any logistics supply chain, Uber doesn’t own taxes, Facebook doesn’t own any content. You’re right, only physical assets – and these are some of the largest growing assets companies in the world really speaks to business model innovation. That’s unprecedented. Uber couldn’t exist 10 years ago, it’s that smart device, social, mobile capability that has this company again valued at nearly $50 billion which is just stunning.
Alex:
(40:37) So just to build on that I would still also you know not neglect the companies that do have assets. The thing is the most successful company in the world is Apple today and they are not just this kind of digital platform. It is one component of what they do, but they do have a lot of physical assets, and a lot of workers around the world, and that’s not likely to change. They’re not going to move towards you know a much lighter and more scalable model. So I think why we are focusing on that a lot is because it’s so new, and I think it’s always dangerous to say that there is this type of business model that is right or wrong.
(41:18) Innovation will always give you new models in spaces where you would have never expected them and that could be you know, asset heavy or asset light. The challenge is you not always to question the fundamental assumptions and ‘okay, these companies have done it well that way. What if we actually did only assets?’ You know, who knows. You have to think, well you always have to be ready to question the fundamental assumptions rather than doing what others have done. So it’s great that you have fast followers that all want to be like Uber and uberization is a big topic.
(41:56) But I think the greatest innovators are those that simply asked, ‘what’s the right way to do this?’ Then they just use others as inspiration rather than something they will copy. So while I am fascinated by these scalable business models, I do think it is always kind of dangerous to fall in love with one kind of trend, and we always need to consider that you know it’s about figuring out the right business model for the right contents.
Michael:
(42:22) Well there is this psychological dimensional that we are fascinated by these start-ups. Although I have to say the idea of a start-up being valued at $10 billion or whatever, and still thinking and employing 1000 people or whatever the number is or more, and still thinking of it as a start-up is that it seems of a little bit of a stretch to me. But there is this psychological element of the underdog and the fact that it’s new, and the fact that it’s such a stark contrast. You know, Airbnb having so little property assets compared to its evaluation, compare to a large established hotel chain, which has physical assets which we all know and we can see. So there is this cycle psychological element which really comes into play here as well.
Alex:
(43:15) I think the number holding on that idea of psychological, I think that is that general danger at the moment that these companies are so highly valued and so high, it almost leads to you know a lot of entrepreneurs wanting to do the same thing and be the same way, and you know young entrepreneurs start to think that if they build a 50 or $100 million business you know that is worth. Maybe makes revenues of 50 or hundred million or is worth 50 or 100 million and they haven’t achieved something.
(43:49) So I think these crazy numbers are also a danger because you know that they kind of make the people that don’t get that far look like they are complete losers, which is obviously not the case because building any type of business is extremely hard. And I think that sometimes gets lost when the press kind of you know pushes these crazy, amazing, fascinating stories but I think it does have an impact on entrepreneurship in general. And that’s dangerous and I think we should kind of push against that a little bit as well.
Michael:
(44:24), When there is a chilling effect that makes entrepreneurs who are starting more modest companies than Uber or Airbnb have self-doubt, that obviously not a positive thing.
Alex:
(44:39) I think it’s also, as an entrepreneur, as an innovator in a large company you need to figure out what’s right for you. You know, it could be perfectly fine to build a $5million lifestyle business or a $10 million lifestyle business, because you not moving toward $100 million revenue and $1 billion in revenue does have a big consequence on your lifestyle. So you need to think always as an innovator, as a business person figure out, what is it that you are passionate about and fun. You know, if you are an executor, don’t become an innovator. If you are uncomfortable with uncertainties, don’t innovate or become an entrepreneur it’ll kill you, right.
(45:22) And on the other hand if you are in a large company and you really are an entrepreneurial and innovator, you are in a large company that doesn’t have a space for that to exist, then leave and build your own company or find a company that gives you that space.
(45:35) I think all of this as at the end, first and foremost a journey of figuring out like who you are and what you want to do, and then you will create the best work you can. And that, there is no right and wrong you can aim for a $10 billion business, but you better be the type for it.
Michael:
(45:55) Okay and on that note I think we are just about out of time with episode number 112 of CXO-Talk.
Alex:
(46:05)This was a load of fun. I hope I said some things that were helpful to people
Vala:
(46:10) Listen, we got more questions in this 45 minute then maybe four shows combined. So thank you for our experiment with us Alex, it was an unbelievable amount of insights that you shared with us in the last 45 minutes.
Alex:
(46:26)It was a real pleasure and an honour to be with you guys.
Michael:
(46:28) Well we hope that you’ll come back. You have been watching a special edition of CXO-Talk, and we have been speaking with Alex Osterwalder, who is a noted author, founder of a company called Strategyzer, and generally acknowledged as the business model and value proposition King of the world.
Vala:
(46:55) The King of the world!
Michael:
Exactly
Alex:
Why not.
Vala:
I agree.
Michael:
(47:02) I’m Michael Krigsman, my fabulist co-host is Vala Afshar, and Vala, I hope…
Vala:
The Prince of CXO-Talk.
Michael:
The Prince of CXO-Talk there you go, the King of CXO-Talk, and on Friday we are talking with Mark Schwartz who is a CIO in the federal government, and I hope that everybody will come back and join us on Friday.
Vala:
That’s tomorrow
Michael:
Which is tomorrow…As it always is. Alex, thank you so much and everybody for watching and we look forward to seeing you again tomorrow, bye bye
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