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In an era of digital disruption, large companies are looking to reinvent their business models. But that is not enough to sustain success, says business model guru Alex Osterwalder. They must build innovation engines that can maintain a continuous flow of new value creation.
In the boardrooms of market-leading companies around the world, management teams are hotly debating an existential challenge: how to strengthen their organizations’ business models — or devise new ones — so that they can exploit the opportunities presented by new, often digitally driven, market dynamics while withstanding the attack of nimbler entrants to their industry. And getting those models right will determine whether the incumbents of today’s boardrooms are able to sustain their leadership.
Alex Osterwalder, co-founder of consultancy Strategyzer, along with his colleague Yves Pigneur, professor of management information systems at the University of Lausanne, are highly regarded thought leaders on business model generation. Their book of the same name, published in 2010, has been the handbook of hundreds of thousands of executives. Indeed, the business model canvas it lays out — a framework of interdependent building blocks such as Key Partners, Value Propositions and Customer Segments — is used as by more than five million people as a template to define, reaffirm and reset their organizations’ business models.
But Osterwalder is in no doubt that in the decade since their bestseller appeared, the landscape has shifted. In the rapidly changing dynamics of today’s commercial world it is not enough to go through that process of business model regeneration just once. Companies, he argues, need to have the structures in place and the management mindsets formed that enable this model regeneration to be a repeatable and continuous process. That way, he says, companies can become not just inured to market challenges but invincible.
There is no shortage of examples of companies already exploiting these new innovation structures. Osterwalder cites not just the tech-led giants of Amazon, Apple, Tesla, Microsoft and Airbnb, but less obvious ones such as Dollar Shave Club and Xerox.
“The reality is that business models are expiring faster than ever before,” he wrote in an open letter to business leaders. “The likelihood of a CEO managing a single business model through his or her tenure no longer exists. You have to invent the future, which requires systematically and continuously inventing business models. You not only have to be world class at executing and improving your current business model, but also world class at searching and inventing new business models for the future.”
The foundation for that is the development of an innovative culture. And in most mid-sized and large businesses today, that is either absent or, at best, a token effort — what Columbia Business School professor Rita McGrath calls “innovation theater.”
Osterwalder also likes to quote McGrath on what she learns when she requests access to the schedules of the CEOs with whom she consults, to see how much of their time is dedicated to innovation. “That’s a good indicator of whether a company is taking innovation seriously,” says Osterwalder. “Unless a CEO is devoting 20% to 40% of his or her time to innovation, they are not taking it seriously enough.
“The bandwidth of the leadership team to focus on innovation makes all the difference,” he says. “Money is rarely the problem; it’s really the senior leadership’s ability or willingness to commit. What’s primarily lacking in innovation today is an understanding of how it really works and the authority to make it happen.”
Osterwalder explains some of the dynamics he sees when consulting on the innovation strategies.
Attempts to innovate will always come under attack from those running product lines that use budgets which could be diverted towards innovation projects because they naturally deliver greater and more immediate revenue than the embryonic products. “Unless there is the authority driving innovation projects, budget won’t be allocated and retained for them. Neither will these internal ‘venturers’ be allowed to go after established customers with future products.
“Established corporations have all the assets — money, brand, customers, infrastructure, scale — required for world-class innovation but they often don’t give their internal venturers, their innovation teams, access to those assets.”
He suggests the power pyramid needs to be inverted. “For innovation to work, you need to start with small teams. But in big companies, the larger the budget and the team, the greater the perceived prestige of the executive. So there is a paradox when small teams that endeavour to innovate are perceived as having no prestige when the reverse should be the case.”
Businesses need a separation of power so that they can protect innovation, as projects can easily be killed off at different stages — for example, when ideas are first validated or when they are going to be scaled up.
In many cases, though, such a cultural change is difficult. Executives say they want their organization — or at least parts of it — to behave like a start-up, to be agile and move fast. But they are not structurally and culturally equipped to do so, says Osterwalder.
“So a company needs to become what business school academics describe as an ambidextrous organization: establishing a space to be world class at exploiting business opportunities, at managing their proven, existing business model portfolio, but also world class at innovating to create a pipeline of new ideas, some of which will become substantial growth engines. The trouble is that each of those needs a different culture, KPIs, skills and people.”
But being ambidextrous doesn’t necessarily lead to internal conflict. “So often leadership teams say things like ‘everybody in our company needs to be an innovator.’ But it’s a partnership. The existing business generates the cash for the future to be explored but the established business needs to accept that they aren’t the guys who will invent the future, so they also need to take the innovator seriously. That’s a hard thing to build under one roof, but establishing conditions for both to thrive is what great leadership teams do,” he says.
Osterwalder, who works with many of the world’s top management teams, including those at Mastercard, Fujitsu, SAP, 3M and Gore, cites several multinationals that are moving towards innovation-led business models in the vein of Amazon with pioneering innovation cultures, where they are investing in 40 to 80 innovation teams per year.
Such teams explore ideas for two to three months to build evidence for a potential product, talking to customers about the business value that the innovation might create, he says. And in about 30% to 40% of cases, that is followed up with investment.
“The others may have technically failed, but they’ve failed cheaply and quickly,” says Osterwalder. “And it’s important that the senior executives in those companies, who understand that it’s extremely hard to get from idea to real business, then tell these innovation groups that they haven’t failed but should appreciate that it’s an exploration journey that is part of the business model.”
Creating an innovation engine
There is a big difference between finding the ‘next big thing ’ — the successful follow-on to a company’s earlier innovations — and creating an innovation business model and culture that provide a sustainable series of landmark innovations.
“When companies feel secure in the belief that they have found the next big thing, they’re the opposite of invincible. Amazon is a great illustration of an ‘invincible company.’ Just look at the attitude of CEO Jeff Bezos, who says outright that Amazon is destined to ‘go bankrupt and fail.’ If you aren’t committed to continuously innovate while you’re successful, then the end is inevitable and on the horizon.
“Most companies think that once they are successful they can relax. It’s the contrary. That’s just when you can’t afford to be complacent. As soon as you do, you run the risk of being disrupted. In the case of Amazon, which is at the top of its game, it’s now showing itself as a serial innovator.”
Amazon, of course, has the revenue stream and investment capital to do so. “It’s the right moment to invest in innovation. So it’s not about the next big thing; it’s about creating that innovation engine. It is continuous exploration and that is why we really need to create those ambidextrous organizations, because it isn’t about finding this or that next business model; it’s about finding it again and again.”
Perishable business models
But those don’t all have to be blockbuster business models that will dominate an industry for decades, as in previous industrial eras.
“That’s the big change,” says Osterwalder. “That’s why many of the CEOs from the previous couple of decades aren’t well equipped for the future, because they relied on business models that had a long shelf life. Business models today are more like yogurt: they have a fast-approaching expiry date. So if their shelf life is getting shorter, a company just needs to accept that it needs to continuously reinvent itself.”
Business Model Generation 3.0
‘The Invincible Company,’ the third major publication by Alex Osterwalder and Yves Pigneur, due in January 2020, promises to enhance the methodologies of their 2010 management classic Business Model Generation for the digital age by covering the creation of perpetual innovation portfolios, business model mechanics, new growth engines and more.
• Alex Osterwalder was a keynote speaker at the Global Peter Drucker Forum 2018
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