ISPIM Webinar: Building Invincible Companies with Alex Osterwalder

Hello, everyone, and welcome to today's session. Today we have a very special guest, Alex Osterwalder, who will tell us a secret how to build invincible Companies. I believe Alex doesn't need a special introduction as we all know him. He's a co founder of Strategizer. He currently ranks number seven among the top business thinkers of the world. He's a passionate entrepreneur and a very demanded speaker. Alex, thank you very much for having a webinar today. The floor is all yours.

Thank you very much. So I'm gonna talk about 30 minutes. I'll get you to do some little exercises as well. And don't hesitate to put questions in the Q and A box. So I want to talk a little bit about the next book project, the next book we're working on called Invincible Companies. And it's all about competing on innovation culture. And I want to just give a couple of our new ideas that are based on the two books that we already have and based on the new book that is coming up. So business model generation, value proposition, design. And what's interesting is that the business model canvas, which I'll get back to you very quickly, I guess a lot of you have heard about it or used it still kind of on the rise. But that's just one tool and innovation is pretty complex. So we need to look a little bit beyond in order not to end up like Kodak. So I'm going to use this kind of tired example. People use it a lot. But I do think there is something really important here that we can learn also related to innovation myths. And the first one is that it's all about technology. So in the case of KODAK in the 1900s, you know, they popularized photography for hobby photographers and they got some cheap cameras out there and they made a lot of money over 100 years. Over 100 years with analog film, you know, selling film and developing film. Now, one could argue that they disappeared or went bankrupt because they're not innovative, but that's not true, actually, in terms of R and D or technical research and product innovation, they helped invent the digital camera. So they actually sold quite a lot of them once they hopped onto this. The problem is that the digital camera, so this innovation, they sold a lot of them, it actually killed the established business model which was based on selling analog film, because you don't need analog film when you have a digital camera. Right? So the question is, what should they have done? And one of the or part of the answer is that they should have focused more aggressively on the business model, it's not that they didn't, but not enough. So the question always that I like to ask people around the world and companies is how much do you spend on R and D and how much of that actually goes to new business models or reinvented business models? I do believe what's happening right now is that business models expire a little bit like yogurt in the fridge. And that's happening faster and faster. Sure, a couple of you had blackberries, now nobody or just maybe 1 out of 100 in a room still have a BlackBerry. So business models expire like yogurt in the fridge and technology and product innovation is not enough. So what's the big challenge here? It's this idea of the ambidextrous organization. A company that is world class at innovation beyond products and technologies in price. Also business model innovation and world class at execution. So this is what we sometimes like to call the ambidextrous organization. And a lot of people wrote about this. But I want to deep dive a little bit into this because I think that's the core of how we need to evolve in companies to be world class at innovation. So when you explore new ideas, uncertainty is very high. That's what I show on the left hand side. When you exploit businesses like Kodak with analog film, uncertainty is actually lower because you know how to run the business model. However, there's a risk of disruption and these two universes are pretty different. And even innovation, it's not really a word in itself. There are three types of innovation and I borrow this quite heavily from Clay Christensen. Sufficiency innovation. If we take Amazon, that's when they put robots into their warehouses. That just helps them do better what they already do well. But sometimes when your business model expires, that type of innovation is not enough because you're just going to more efficiently die. So that's why we need to look at sustaining innovation, replacing some of the older products and services with new ones. In the case of Amazon, I would argue the Kindle was a sustaining innovation. And then we have the one that we're most interested in, which is growth innovation. And that's where it gets really difficult. That's where with Amazon, you'd have Amazon Web Services. This is a really different type of innovation that requires a very different approach. So if we look at this, it really kind of is contrary to what a lot of people focus on when they say innovation. They focus a lot on technology, but it's not just about technology. And I like to show this example, it's actually the contrary. When Nintendo launched the Nintendo Wii quite a while ago, they actually disrupted the entire industry with an inferior technological platform. Why? Because they came up with a better value proposition and a better business model based on inferior technology compared to the other platforms. They were targeting casual gamers with an off the shelf technology motion control that was already there. So it's not always about technology. It's really about figuring out the right value propositions and the right business models to sometimes leverage technology and sometimes just create new value. So again, back to this question which I like to ask when people are in a physical room. How much money do you spend on research for new value propositions? And how much do you spend just on technology, products or price? So I believe we need to create some space for the latter in particular if we have a big R and D budget. So I'll talk about Bayer and the German pharma company a little bit later on. Then it's even more important to take part of that budget and allocate it to value propositions and business models. This is what I like to call business R and D. Okay, so back to this year. It's really important to understand that innovation can happen on the left and on the right, but the focus is very different. On the right hand side we focus on innovation that improves in the existing business model and value propositions. On the left we're talking about new stuff and growth. When it comes to investment philosophy, that is very important. On the right hand side actually don't want to take too much risk. It's more about dividends, sure bets that will have a guaranteed return in the relatively short term. On the left hand side, we have more VC style investments. Many won't work, they will actually fail, but some will work exponentially. And then culture and processes very different on the left hand side. And on the right hand side, when we look at growth innovation, we need to be very iterative, move very fast, make fast decisions. This is very different from the execution culture on the right hand side which has its place and it's perfect when you're managing a supply chain or nuclear plant, but not great for innovation and the same for people skills. On the left hand side, people who are good with exploration, pattern recognition. On the right hand side, people who are more process and detail oriented. Okay, so now taking this, I want to look at three business model portfolio, inventing business models and improving business models. So three big topics. Let's start with the first one and when I say portfolio, it's like designing a visual tool that allows you to look at the left hand side of profitability. Low return at the bottom, high return on the top and uncertainty risk. High risk on the left, low risk on the right. If you look at businesses, we'll always have the strongest contributing business model at the top and the merging ones at the bottom. At the end of the day, it's like a life cycle going from the creation of a business to making it more efficient once it's running and it has a certain scale, but then also accepting that mature businesses decline and we need to maybe reinvent them or replace them. That's what I say, what I call the portfolio. Quick example. So Nestle has a whole series of business units and this is their kind of financial return in 2014. So we're just looking at the profitability axis over the following two years, slightly changed. So all the different businesses, more or less profitable, they made some acquisitions. So you look at their existing portfolio. The question is, and I want you just to reflect maybe 20 seconds on your own. If you look at these businesses, business units, milk products, pet care, prepared dishes, confectionery, water, etc. Which one is most at risk of disruption? So we're looking at the bottom kind of scale from high risk to low risk. So have a quick reflection on which one is most at risk. Which business model here could be at risk for nestle? So just 20 second reflection, which one of these businesses do you think, if you look at the bottom axis, is most at risk of disruption? Think a bit. Think about the argument. Also, if you say water, why water? Sometimes people say, well, you know, prepare dishes because there's more, you know, food services now and Delivery of food, etc. Etc. Those are all good reflections. And we could argue maybe all of these businesses are under threat, but the one I would point out is the sugary product. So here we have actually a regulatory disruption because confectionery, the chocolate business, is really about sugary products in the U.S. you know, there's a big backlash, regulatory changes. Neste actually got rid of confectionery and sold it to Ferrero. So question is, what are they going to do with the legal changes? That's just to illustrate kind of one aspect of portfolio. But now let's zoom in and look at these two. We say you need to have two portfolios, one to invent new growth engines and one to improve the existing businesses. So we're going to look at these two and understand how they relate to each other. And that's kind of the topic of our new book, so whole idea here is that you have a whole funnel, new ideas that are going to become existing businesses and then the existing businesses are going to kind of expire over time. So you need a complete two portfolios that complement each other. Exploitation of existing businesses, like we've seen with Nestle, and exploration of new businesses, which follows a very different logic. Now what does that mean? You have businesses of which some will expire and decline. And while you have that going on, you want to make sure that you invest in a whole series of projects. Not just technology or product innovation, but figuring out the right new business models, new growth engines. Some of those will emerge as winners and some of those will at the top will disappear. So I like this flame animation show that some of your businesses are inevitably going to die. The question is, did you prepare a Explore portfolio that's going to replace the existing businesses? So that's the kind of the logic that we're following here. So let's look at exploration and a little bit the logic here. And we'll try to use the chat window. I don't know if there's a chat window somewhere where you can post your guesses, right. So we can do the exercise together or at least write it down on a piece of paper. So let's look at Nespresso, an older kind of invention. But the story of Nespresso is pretty interesting and I like to use this because we can look back on it and learn from it. So basically at the center there was a technology innovation, a product machine and pods. And put the pods in the machine and get a grade coffee, great espresso. That was a big shift for Nestle. Moving from business to business, selling to retailers towards a new business model that they explored selling to consumers, which now is established. But it was a painful history. So let's look at this when they. And now we're looking at the Explore portfolio. When they invented the machine, the inventor Eric Favre actually came up with the first business model which was in business to business. They were selling first to offices and restaurants and that didn't really work out. So they killed that and pivoted to a different business model. This guy here, Jean Paul Gaillard, came up with the business to consumer model. And that one around the same technology actually started to show some good signs of health. So moved up to the high expected kind of profit and impact and low risk because they started having proof from real purchases that then became a real business which they took up into the exploitation portfolio. They scaled the business and it continued to grow and started to become the biggest profit contributor. Lesson here. The business model actually made the difference. So now before we look at how that business model expired, let's just ask why did Nestle just produce one Nespresso sized success? 33 years. And I'm not talking about the technology, I'm talking about the business impact. So what I want you to do is ask yourself, write it down on a piece of paper or in the Q and A box. I think we can use that maybe to post our guesses. How many hundred thousand dollar innovation projects does it take to produce one multi billion dollar success like Nespresso? So the quest here is not how many ideas does it take, but how many innovation projects? So how many projects would Nestle have to invest in to create one Nespresso sized success? So maybe punch that in to the chat window to come up with your guesses. I'll give you kind of 30 seconds to reflect on these three different numbers. How many projects in the upper left hand side, how many of those projects? If you say 10, how many are going to fail? For example 8. Then one would know some success and one would be a multi billion dollar kind of thing. So Christian here says a thousand. So do the math. 1,000 times 100,000 to get $1 billion success. That is not going to leave a lot, a lot of space for profitability. Let's see if we get other guesses other than Christian. Other guesses, Tap them into the Q and A window. Who wants to compete against Christian's guesses here? I think we have a chat window somewhere and I can't see that. Oh yeah. So we have Philip who's saying 25. So you can also use the chat window. Let's see if we can get one or more two guesses. Otherwise I won't go on. I need some guesses. Irina says 100. So if we say 25, right, that's 2.5 million. If we say 100, that is 10 million. If we say a thousand, that's a billion. Right. So we invest a billion to get a billion. Interesting. Maybe one more guess. Somebody 10 projects. This sounds more like Rafaela. That sounds more like Nestle. Right. So maybe you're working there. So let's see what actually came up. So the result here is 250 projects of which 162 will fail and 87 will know some success and only one will become a multi billion dollar success. So the question of course is well, why 250? Where did I get that number from. And if you look at it, we're going to look at a proxy kind of data. It's early stage venture capital, the return. And early stage venture capital turns out that 6 out of 10 investments lose money. 3 out of 10 makes some money. So that's from 1x return on capital to about 50x. And then you only have 4, 4 out of a thousand that are real home runs. And that would create a more than 50x return. So the lesson here, of course, is that you can't pick the winners. Even the smartest venture capitalists can't pick the winners. So the Numbers Here are 162 that fail, 87, know some success, smaller ones, but not the expected kind of hope for success. And only 1 out of 250 is really the home run. Now the lesson here is really you can't pick the winners. And now most of us know that innovation is about trying many things. But when we look at how businesses manage their innovation, they expect always a return and a winner, which gets people to minimize kind of the risk. And they won't work on the big potential home runs. So if you take Amazon, for example, company that is really the number one in innovation, we can criticize them for many things, but definitely not innovation. They really accept that failure and invention are inseparable twins. You can't come up with these big successes without investing in losers. And that is what we mean with the funnel that I already showed you. You actually need to invest in many projects to get some winners. What that means is you put a little bit of money in some and you kill maybe after three months. We call that a sprint. You give another four to six months into the projects and you gradually invest more the more evidence they bring to the table. And I'm not talking here about technological proof. I'm talking about evidence that shows that this is interesting in the market and that we can earn money from it. So basically, if we look at the exploration portfolio, that means need to test ideas to move them from the left to the right. So here we're not talking about disruption risk, we're talking about innovation risk. And we can reduce that by testing our ideas. The question, of course, is how do we measure innovation risk? And that's with the whole kind of customer development and lean startup approach, where we test basically three to four things. Desirability, do customers actually want this? Feasibility, can we build it? And viability, can we make money from it. So the last one would be adaptability. So the risk of failure here is the big challenge. And we do that by testing our ideas systematically. Again, not the technological and kind of R and D risk, but the risk of this becoming a big flop. The way we do that is with hypothesis experiments, evidence and insights. So. Sorry, here I'm in a co working space, I've got to just, just check if I can get them to. Excuse me. So we also need to look at the expected return and with the expected return, I mean the business model design. So can we get people to improve their ideas over time? So here inspiration is Roger Martin's thinking of not just working on kind of better products and services and better price, but actually looking at how we can improve the business model. So this is a very important part that we're going to publish in our next book which we call innovation epicenters where you can actually innovate from the right hand side, customer driven innovation. From the left hand side, resource driven innovation or from the finance side which we call kind of profit center based innovation. This is what we like to call business model mechanics and we have a series of those. I won't go deeper because I want to focus on the portfolio aspect. So if we just look at how we've been doing this so far. We've looked at seven different questions. So this is how we've done it so far. You can download this on our website. 7 questions to assess ideas, business models, new business models, New ideas so you can differentiate and compete beyond product, services and price. So let's do one last thing. I want to look at how we can improve existing business models by innovating existing business models that we have in operations. So how do we look at improve? Basically it's a business model that has grown over time that starts to expire and we continuously try to improve it from a given state to a new state. So an example here is Hilti where they moved from a machine manufacturer, tool builder. If we look at the business model, high end machine tools for builders, salesforce to kind of put that in place, direct one to one relationship, transactional sales and a backstage that makes that possible with factories, patents, branding and certain activities with the given cost structure to to work on the existing business. So over time this business model grew and it turned into a bit of a challenge when Asian low cost manufacturers started to have an impact on their turnover which dropped by 20%. So what did they decide to do? They decided to shift from a sales model to a service model. And the question is how did Hilti's business model have to change? So quick question to you. If we look at the old business model which you have here and we look at the different elements of how they moved from a product sales model towards online rental. The a there which is helping customers have the right tool at the right construction site at the right time rather than just selling those tools or fleet rent rental if you want. The question is where would you put the different elements in the different boxes? So maybe you can just have a quick reflection of how to move those things into the different boxes. I'll give you 20 seconds or so to have a quick reflection. Okay, let's look at the solution. So basically the online fleet is the service that you can rent. Now. The customer segment is not the builders anymore, it's the bosses or fleet managers. And what do they buy into? They actually buy into fleet management service online through the digital channel and they pay a recurring revenue fee for that. So they're locked in for a longer time. So we moved from a transactional sales model to a lock in model with recurring revenues. Changes the backstage of course we have key activities which are logistics changes, the cost structure and even accounting wise. Instead of selling the tools and having them out of their books, these are now investment costs inside of their books. So fleet management being adopted by whole series of companies and that allowed Hilti to rejuvenate their business model. So basically this allowed them to not just kind of reinvent something from scratch, but improve an existing business model. Again here technology was not the core driver. Did have an aspect of digital transformation, but pretty interesting. So the whole idea here is going from old to new ways of doing things. And like we had a whole series of things that we could do before. Here is one more kind of slide showing that there's a whole series of from tos, not necessarily just from product to service. Okay, so I want to end here with just creating innovation portfolios. So last one here, the contrary to Kodak is Fujifilm. They went from selling film towards something different because their chairman was obsessed by going out of business. So they didn't just do product innovation. They said we're going to shift business models. And they went into cosmetics because basically the same chemicals, the same processes of kind of managing aging film work also for aging skin. So that means that Fujifilm went into a whole new series of things, in particular cosmetics and launched Astalift when Kodak actually went bankrupt. Last thing here, some companies are using this approach now with the funnel. Bayer, who we're working with over the last few years has invested in 68 projects. They made follow up investments into 21, and they implemented six projects, so they really are starting to build that funnel that I was talking about. Thank you very much, everybody.

Alex, thank you very much for this great talk. It was a great honor to have you here, and we look forward to meeting you in Florence.

Same here. We'll go deeper on the different topics. Bye. Bye.

Bye, bye.