Ep. 206 – Alex Osterwalder, Co-founder of Strategyzer & Author of The Invincible Company on Building Innovative Companies

Ep. 206 – Alex Osterwalder, Co-founder of Strategyzer & Author of The Invincible Company on Building Innovative Companies

Inside Outside Innovation is the podcast that brings you the best and the brightest in the world of startups and innovation. I’m your host, Brian Ardinger founder of Insideoutside.io, a provider of research, events, and consulting services that help innovators and entrepreneurs build better products, launch new ideas, and compete in a world of change and disruption. Each week we’ll give you a front row seat to the latest thinking, tools, tactics, and trends, in collaborative innovation. Let’s get started.

Interview Transcript with Alexander Osterwalder

Brian Ardinger:  Welcome to another episode of Inside Outside Innovation. I’m your host, Brian Ardinger and as always, we have another amazing guest. I’m so excited. Alexander Osterwalder is a Swiss business scientist, entrepreneur, author, and strategy consultant. You probably know him if you’ve tuned in, based on his work on Business Model Generation. He’s written the Value Proposition Design, Testing Business Ideas, co-founder of Strategyzer, and author of the new book, The Invincible Company. That’s why we wanted to have him on the show. So welcome Alex.

Alexander Osterwalder, Author of The Invincible CompanyAlexander Osterwalder: Pleasure to be here. Thanks for having me.

Brian Ardinger: Well, I’m excited to have you here. You’re coming to us all the way from Switzerland, but you’ve always been a big mentor of mine. And a lot of the folks that you have around your circle, whether it’s David Bland or Tendayi Viki and that. We’ve learned quite a bit about corporate innovation, startup innovation, and I wanted you to have you on the show to talk about your new book and some of the new things that you’re seeing in this world. For folks who aren’t as familiar with your work, can you give us an arc of how you started with Business Model Generation and how you got into The Invincible Company?

Alexander Osterwalder: That’s going back pretty far. Right. But years ago, we published a book called Business Model Generation. Actually, published it with my former PhD Supervisor Yves Pigneur. He’s an academic. And I went out into the business world and our idea was, you know, bringing a better way to describe and change business models to the world. So, we created the business model canvas, which comes out of my PhD dissertation and the tool and the book took off like crazy.

So now there are millions, literally millions of people around the world using the Business Model Canvas, which is this simple tool to sketch out business models. And then the book took off and is now selling over 50 languages. So, it was really fun to see how that took off. But again, it’s one tool and one tool doesn’t solve everything. Right? I like to make this analogy. If your surgeon walks into the operating theater with a Swiss army knife, you’re going to run away. Right. There is no one business tool that does everything, and that was never our intention with the Business Model Canvas. So over time companies we were working with, we were seeing the different challenges that they had when it comes to innovation.

So, we expanded the toolbox and, you know, the big, first expansion, it was meeting Steve Blank, the father of the Lean Startup movement, and then putting that tool set together. And then Eric Reese made it popular throughout the world. Right. So that was the next kind of step. And then we just always asked ourselves, okay, what does the world now need based on the problems we see.

And we always say, when companies can’t innovate, we don’t blame them. We blame us. We say, okay, the thinkers and authors and doers and educators are not doing a good job. Consultant’s not doing a good job. So I don’t like blaming companies and saying, they don’t know how to do this. They don’t know how to do this because nobody’s showing them right. Nobody becomes a surgeon or an innovation surgeon overnight. So that’s how we kind of evolve with our books. Second one was Value Proposition Design. Third one was that Testing Business Ideas with where David Bland was the lead author.

Alexander Osterwalder, Author of The Invincible CompanyAnd then the last one is Invincible Companies where we really realized, Hey, a couple of things missing that we need to bring to the table because we always ask, does the world need another business book? Very rarely yes. The answer, but we arrogantly think every now and then this is a yes. So here it’s two topics that we really looked at.

What do leaders need to understand in order to build innovative companies? And the second part is the business model topic, we believe is still not fully explored. So we help people design better business models. So, leadership to really innovate constantly. The other one is how to bring better business models to the world to stay ahead of everybody else. Because I think innovation today is stuck in product and technology innovation. Not good enough. It’s a game you cannot win. I’m not saying you don’t need technology innovation, but you can’t stay ahead with that. So, we go a little bit further and show what leaders need to do to build, we call it the invincible company, you could also call it resilient or defensible company.

Brian Ardinger:  We are recording this live as part of our Inside Outside Innovation podcast series. But because it is live, we do have a number of people in the audience, and we want to make this as interactive as possible. So, I’ll ask some questions and that, but if you have a question for Alexander, you can go to the Q and A bubble at the bottom of your resume there and put it into the Q and A box there. And we will try to get that answered. Please start putting in your Q and A questions as we go along. Why do you think companies need to pursue this systematic reinvention?  What’s changed versus years ago when you could keep your business model forever?

Alexander Osterwalder: Maybe actually let me draw something here. So, let’s see if I can share my screen. Traditionally, every company starts with an idea. You can even take a Nestle, biggest food company of the world, they started with an idea. And then what happens with a startup? Is it tries to become a real company? Right? So, let me just draw this a little building here. Let’s call this a $1 billion company.

Now, traditionally, people write a business plan or used to write a business plan. It has this wonderful thing going up here, but business plans don’t really work because the innovation journey and entrepreneurship journey is a messy one, right. Ups and downs. And then you try something. Customers say they don’t like this. They don’t want to pay for it. And if you survive this journey, okay, good ideas, good technologies. Rest in peace. You become this real company.

Now here’s what happens afterwards. Once you’ve found a business small and you scale it. You don’t focus on this search anymore on this exploration, but you focus on scaling and managing, right. You’re manage. And we call those two worlds here, Explore, which is the world of entrepreneurship and innovation and Exploit, which is the world of managing a business. So, what actually happened, let’s say over the last, you know, 100, 200, 300 years of business. Is that companies got better and better at managing what they have, but because they focus on that, it’s almost like they forgot this exploration skill.

And that was okay for a long time because the world was moving very fast. You had to do product innovation, but your business small would usually be very stable for a long time. Even in one industry, you’d have the same business model for decades, right. Or for hundreds of years. Now what happened is that it became less and less reliable, you know, focus on one business model. Today if you’re a leader of a company, you probably have to reinvent your business model. If you’re CEO for our leader for a long time, several times over your career. So, the shelf life of business models got shorter and shorter. And I like to say, you know, business models, value propositions, they expire like a yogurt in the fridge.

So that means you have to buy a new yogurt, or come up with a new yogurt, right. So, what happened is that this year Exploit is it’s stronger than ever before at risk of disruption. And, you know, let’s take the situation. Now everybody’s business model was disrupted. Even those that had a positive disruption like Netflix or Zoom, that was in the positive sense. Now let me add one last piece here, just to the visual. The Explore world here is one, a very high uncertainty. Okay. High uncertainty. You don’t know if things are going to work. In the Exploit world, you have some relative certainty in the sense that, you know, the business model, you know, the value proposition, you know, the customers over time, but now everybody was kind of pulled over here,  back to the Explore world.

And I think besides the fact that this has a very dramatic impact on job security, on health, et cetera. I also like to see the very positive side of this because it forced us to rethink the way we do business. On the one hand, in terms of our business models. On the other hand, also in terms of how we organize, because all of a sudden, we see, Hey, there is a huge workforce of underpaid people that are now jobless. And there’s no, you know, there’s no security.

So, we’re seeing good forms of capitalism, bad forms of capitalism. We’re seeing companies that are opening up their hands, you know, and they’re asking for government support. While, you know, just a couple of months ago, they were buying back shares and putting money in the hands of the shareholders and they didn’t think long term.

It is a big crisis, also for the ugliest form of capitalism. And it shows the strength of the better forms of capitalism, but I don’t want to get too political, but I do think this is a really, really big moment in many, many ways. That will also have, I believe once we come out of this, an extremely positive impact because it resets the way we think.

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Brian Ardinger:  You and I were talking a little bit earlier about how different companies are approaching this pandemic and approaching innovation. And some of them have hunkered down and try to reinforce their existing business model, where others are saying like, Hey, this is the perfect time for us to try some new things or experiment whether they have to, or not. What’s your advice for companies that are in that process of trying to figure out, should we go, all horizon three, shoot, the moon loons shot things. Or should we focus on our innovation at our core and making that better in this turbulent time?

Alexander Osterwalder: I think it’s a great thing to refer to different types of innovation. Right? So, use the Horizon model by McKinsey, right. That Horizon One closer to the core Horizon Two further out, and then Horizon Three, really breakthrough innovation. I think that’s very important to define that first because when people say innovation, it means nothing. Right? So, when a leader says, we need to innovate, everybody needs to be an innovator. Then, you know exactly they don’t understand what innovation is. Right.

I like to use, could use the Horizon Model, but I like to use Clay Christensen’s approach. It is more like efficiency innovation, improving what we have. Let me just quickly share the screen back here. Right. So, efficiency innovation, is here in the more on the Exploit side. And then you have Sustaining innovation, which might be here more in the middle, and then you have Breakthrough or Transformative innovation over here. And now my drawing is getting really messy. So, I’ll stop sharing that, but we have these three types of innovation. Now it does mean you need to ask yourself, where are you today as a company?

You know, how much at risk are you going out of business in the next weeks, months, four years in terms of business model, in terms of cash reserves, et cetera, et cetera. And you know, we’re going to be stuck in probably two years of a recession. So, you first need to just draw the picture of where you are and then you start to ask yourself, do we need to start to work now on breakthrough innovations while we have this opportunity because we have to. But if you’re running out of cash, you don’t have that time. Right? Because breakthrough innovations, you don’t come up with them overnight. So, you probably have to focus on the quick wins.

So again, you know, it’s the bad answer always is it depends, but I do think it’s a very good assessment of where your business model is today. And I like to call it business model portfolio. Very few companies have just one business model. Where’s your portfolio today? How much time do you have in terms of cash and then move on?

So, take Airbnb, was in the news yesterday, an extremely good example of a company that had to cut back. They didn’t have a choice and they did it in a very humane way. Right? Very decent way. They cut back as little as they had to 25% of their workforce. And they scaled back some of the innovations that they were working on, but they didn’t completely cut back on the disruptive part, the longer term, but they obviously focused on the short term. So, a very balanced approach, I think it’s a beautiful case study.

We’ll see, you know, how they will survive this because that’s the reason why I would choose Airbnb as a good example. This is the hardest hit industry, right? The travel industry, travel and tourism. You’d say it’s a miracle if you survive this. But let’s see, you know, what Airbnb will do. They raised $2 billion and cut back on the core, and they did it in a very decent way. Because I think another example is Disney. They did it in a, not that I know too many details there, but I would say that’s not how to do it. Cutting back a hundred thousand peoples, but while you’re buying back shares paying dividends and I think big bonuses, probably not the right message.

I would work on all three H1, H2, H3, depending on your situation. And of course, let’s be realistic. You need to first protect the core in a crisis like this. You need to reduce and really maximize the core, which also shows innovation is rarely going to save you if you don’t take care of the core first. So, I get all excited when I talk about this…

Brian Ardinger:  You talk about this portfolio mapping. So that’s maybe the first step is to understand the…your base case of where are your bets being placed right now, and then across the Horizons, whether it’s exploring or exploiting. And then once you have that kind of map, then from there, you start prioritizing and figuring out like, do we have the right mix? Or what’s the…?

Alexander Osterwalder: Yeah. So, I’m a big believer in visualizing. So, I will visualize again. We have this tool that we call the portfolio map. It’s two boxes. And on the top side here we have what we call the Exploit portfolio. These are your existing businesses and you look at them two axes here. It’s how profitable or how good is the return here? Plus, the higher up, the more money a business model makes.

Down here, let me see if I can draw this very quickly. We have what we call death and disruption risks. So, this should be a skull if you didn’t see it. So now you start looking at you are businesses. I’ll draw a little business model canvas here. You say, Oh, you know, I’m Netflix, this is my streaming, was pretty much up here. Right. That makes a lot of money. It’s still growing and probably pretty well protected from disruption.

But if you can already see, Oh wow. Over the last month, my business model started to go down here because you’re making less money. You have to close the stores. You already know, okay, this was disrupted, but then you need to ask yourself, let’s look at the next six months. Let’s look at the next 12 months, 18 months. Is it going to move over here in the sense that this is a business model, it’s never going to come back or it’s going to take a huge amount of time?

Take the movie theaters. Wow. It’s not clear what’s going to happen. So, movie theaters are probably somewhere over here in terms of death and disruption, but disruption happened to this. So, this is the immediate in terms of financial. This is the probability, the trajectory. If we take a historic example, of what happened to Kodak? Okay. If we take the cameras here used to have these analog cameras with analog film, got disrupted. Okay. They didn’t change. The business model went down, profits went down and then rest in peace because they didn’t reallocate the resources.

So, what you need to ask yourself now is if you’re moving over here, how much do you now need to either, the two options that you have? One is, let’s say our business model is now down here. It’s making less money and it’s likely to die. Can I move it back up here? Right? Can I improve it? Renovate it. And that can be. So, in our new book, The Invincible Company, we show what we call shift patterns. Where you can shift from an outmoded or dying business, to a new one.

A good example there is Hilti. Hilti is a manufacturer of light machine tools for builders. They used to make, Oh, here my drawing skills are going to die. So yeah. Well, I’ll make people laugh a little bit. You know, this is, this is a drill. Okay. So somehow is a drill. So, they use the manufacturing and sell drills. Now they decide, and this has happened in the last financial crisis. They decided to reinvent their business model of manufacturing towards the service business model here, which was not just services added to manufacturing, but at the core of what they do. So, they would offer building companies, a fleet rental service online. And provide them with the right tool at the right place at the right time.

And customers loved it so much that that became the core business model. They still sell some tools, but the rental became a core thing, but now it’s a service company, so their business model change. So, can you do something like that during COVID-19, but then let me go to this part. Here’s the Explore, the explore space, same thing when you’re exploring new ideas.

You need to look at the potential profitability or expected profitability. Could this idea make a lot of money? Okay. Oh, is a great idea. You know, it looks great on paper could make a lot of money. But if it’s just an idea on paper and here’s where it gets critical for COVID-19 days, if it’s just an idea on paper, you also need to realize here, this is a different type of risk, not death and disruption risk. It’s what we call innovation risk.

Innovation risk is the risk of pursuing a stupid idea or an idea that’s too premature because the infrastructure is not there. Right? Which means you need to test your idea. You test it. Oh, nobody wants to pay. Maybe it goes down here, but you just learn what not to do. I’m going to pivot my idea and that’s here. I’ve got a different business model until you can bring it up to here. And at one-point, transfer it into the Exploit portfolio, but here’s the challenge. Right. We have very little time. You have enough cash to actually start exploring. That’s the key thing and companies that bought back their shares that paid bonuses, focus completely on exploit, but you know, it didn’t build up the Explorer skills and now don’t have the money it’s going to be very tough.

Brian Ardinger: You know at that Explore stage, you can’t at the very beginning bet on which ideas are going to be successful because they’re unknown, uncertain. So, you have to have a lot of them in the funnel. And I think that’s where a lot of corporations fall down and it’s like, they spin up an innovation lab and they put 10 ideas through it. And they say these 10 ideas are going to make or break the company where in reality, you probably need 250.

Alexander Osterwalder: That’s what I was going to get to. I was going to make that a little guest. So, here’s the big thing, right? The innovation myth is I’m in an established company. I need to build a new billion-dollar business model. People think I make a big bet to have a big return. But in the Explorer world, you don’t know if it’s going to work. So, the reality is you actually need to invest in 250, and this is where the data stops probably more, 250 projects in order to get one that makes it up here.

How do you actually do that? So, to make this clear, a company that did this, really well, is described in our new book, it’s Bosch. They invested, over three years, into 200 projects. Okay. 200 over three years. But here’s what they do, because you can’t, you know, afford 200 projects, you know, over a year or so. So, after three months they give them actually about 130,000 Euro. After three months, they kill guess how many projects they killed? 70%. Okay. So only 30% make it to the next level here.

And then they do the same thing after six months, they kill another, a bit more than 70%. That’s creating now this innovation funnel in their case about 14, over three years made it to Exploit. In innovation, you need to invest in many ideas, a little bit of money, and then only invest in those that bring evidence to the table. So, the winners can emerge. Here’s what leaders need to do. That big leadership task is not to pick the best ideas based on their opinion. But it’s to create the conditions for these ideas to emerge, which means the right culture, the right guidance. Okay. The right incentives, which is very different from the exploit world. And that’s where it’s really difficult for companies these days, because they’re so used to managing the existing.

Brian Ardinger: And that brings up a good point about culture and hiring in that they are considerably different skill sets, to some degree, whether you’re have been hiring for a particular business model. And those people are experts in what they do. And they’re job is to optimize that model. Versus if you think of an entrepreneur or startup where. Their job is to really seek a business model that actually works and on that search mode. If you’ve hired and built an organization around your existing business model and existing people to optimize that model, how do you then go about creating an environment or culture that allows that exploration?

Alexander Osterwalder: What you want here is small teams of two people maybe that are starting the project. And the more you find evidence that this is actually a good idea, the more you add team members. Okay. Cause this also means more dollars. And here’s the thing you should have probably one or two people who are professional innovators, professional entrepreneurs. And here’s another big thing that people mistake, they think, Oh, innovation is about technology. It’s about science. R and D no, it’s not. It’s about entrepreneurship, which may or may not use technology or science. Right. So, these need to be professional entrepreneurs or entrepreneurs, innovators, however you want to call them.

And the team that grows can actually draw here on people from the core. It could be people from the supply chain, from marketing, who knows this particular market, or sometimes you need to bring in new people because now, you know, you’re working on digital. You might not have those people in the court, but you grow the team based on what you really need. And the difference with the startup is that you can draw from the core and that’s what you should do for a very long time. And if you’re in an area that is pretty close. But here what’s really important. This is the one I would want to emphasize most.

I remember having a conversation with the CEO of Logitech, Bracken Darrell. Amazing person who really turned around Logitech. He said, we talked about this idea of professional innovators or professional entrepreneurs, salaried paid entrepreneurs. He loved the idea because he understands that you actually get better over time. It’s a profession. You don’t take somebody who’s really good at managing and put them in innovation. And he, or she is good overnight. They can become good at innovation, but it’s, it’s actually a different job. It’s one that you learn. And this is what I think we’re missing in many companies is professional innovators.

I don’t think we’re missing the talent, it is there, but people who’ve done this over and over again. That’s what we’re missing. And that is the crucial thing that we need to build more of, is people, their only job is to innovate. And here’s what makes me laugh a little bit. So, when I hear companies saying, yeah, we do innovation. We’re giving people Friday afternoon, 20% of their time, day per week. Did you ever say that for marketing? Hey, you know, go do a little bit of marketing or go do a little bit of financial reporting on Friday afternoon. Like that makes no sense. Right?

So, I think what we’re seeing now is innovation is becoming a profession and a real function. But again, we don’t want to create a silo. We want to have a mix, but you do need to have a least one person who’s done this a lot for the more breakthrough type of innovation.

And then you can ask from everybody else, efficiency innovation, everybody needs to think how to improve, but not everybody needs to build new growth engines at a company. So, people get confused and say, no, no, no, everybody needs to be an innovator. No, don’t, if you’re running a supply chain, you’re just going to incrementally improve because the supply chain needs to run because you’ll lose millions of dollars. What sounds trivial is not what we’re hearing from leaders these days. So, there’s these myths around innovation that are now starting to be cleared up.

Brian Ardinger: So how do you go about measuring the early stage stuff? A lot of times corporations will look at an idea it’s like, well, that’s never going to be big enough or it’s too small. And you don’t know until you actually test and build and experiment in the marketplace to see if it’s actually to get there. But a lot of ideas are killed too early because of false measurements or measuring the wrong things. Can you talk a little bit about how you measure success across this platform?

Alexander Osterwalder: I will go back to drawing just very quickly. And let me just assume that some of you know, the Business Model Canvas and others, you can Google Business Model Canvas. Very simple tool to map out business models. You do this to shape your idea. And I’ll put the idea at the middle at the risk of being mistaken for the product is the core thing. You have an idea you shape, and it could be market opportunity could be a technology, could be a product, whatever, you shape your idea with the Business Model Canvas, we call this business model design. But then the second step most important is hypothesize. Ask yourself what needs to be true for this idea to work?

And you will come up with four types of hypothesis, four types of risks. Everything related to the fund stage, which is what we call desirability hypothesis. Will the customer buy it? Is the customer interested? Then we have feasibility hypothesis. Everything, the backstage of the business model. Can we actually build it? And then we have viability hypothesis. Can we make more money from it than we spent? Okay. So, desirability, feasibility, viability.

And then around a business model, you have the business small environment. We call this adaptability hypothesis. Can this survive in a COVID-19 environment or in a recession for the next 18 months or so. So, four types of risks, and here’s where it gets interesting. And here’s what we are, where I’m getting to the answer of your question. We can measure this, right? So what, the one thing you want to measure when you go from idea to business, is you want to admit uncertainty is high. I don’t know if I, my idea’s going to work.

And we just said we had four types of risks. So, we have desirability plus feasibility plus viability plus adaptability risk. And this is the only thing we need to reduce, reduce risk and uncertainty. And we need to measure, did we reduce the risk that people actually don’t want it? Did we reduce the risk that we can earn more money from it than we spent? So you gradually measure how much you reduced the risk.

Question of course, is how do I do that. Experiments. So you maybe talk to a hundred customers. Oh, I just learned, stupid idea, but I learned what not to do. I’ll do a paper kind of, you know, a PDF exercise with my product description. Just learned, which features customers don’t like. Oh, now I’m going to do a technology prototype. Right? So, you increase the spending in experimentation and prototyping the more you reduced uncertainty.

So here’s the big thing. You don’t need to build anything to test. There are many different experiments you can do. That’s why we wrote Testing Business Ideas because there’s a whole library of experiments. In that book, we came up with 44 experiments that you can conduct in order to reduce risk and uncertainty. And this curve here is the one you measure.

So we measure, so with Strategyzer we created the Strategyzer Innovation Metrics. You measure the reduction of risk and uncertainty in order to be able to compare ideas. So now you can say here’s an idea that can make a $100 million dollars. Here’s an idea that can make $500 million. Can we compare which one we’ve de-risked more?  So again, we try to make this very practical, so we created the Innovation Project Scorecard and download it on the internet. So, we can score every project, look at the size of the opportunity.

That’s a traditional measure, but that’s just a fantasy. But then we look at how much did we de-risk each one of these ideas, and then you make an evidence-based investment. You only invest based on the evidence that the team brought to the table. And that’s where the portfolio management comes back together because now, you’re going to make evidence-based investments in your portfolio.

And remember the Bosch example. Now, you know, which ideas to kill, because you’re going to kill here. Remember this one, you’re going to kill after this first stage. Not based on which ideas you like but based on which ideas brought most evidence to the table, you’re going to give the team, teams that got evidence follow up investments. And then at the next stage, again, you’re going to only reward the teams that bring the required evidence to the table.

You’re making evidence-based investments, which means you’re constantly reducing risks. You’re going to have a return on portfolio, not a return on project because return on projects makes no sense, in ideation.

Brian Ardinger: I’ve got a couple more questions on that, but I know that our audience probably has some questions as well. So, reminder if you have any questions, put them in the Q and A box at the bottom of the Zoom there. We talked a little bit about culture, but a lot of the book invincible company, it goes into culture as being one of the core assets. And is this something that has to be driven from the top down with the management coming on board with this methodology or can the average employee within the organization start applying some of these methodologies?

Alexander Osterwalder:  Everybody can apply the methodologies. It’s just that it’s not going to be very effective, right?  Because if you start innovating. And, you know, you’re experiment and your testing, you’re reducing risk, you’re doing the right thing, but you as a team member are measured based on execution metrics. You’re basically committing career suicide.

So that’s where startups are better incentivized because they’re incentivized to do one thing, which is to find a value proposition that customers care about and the business model that can scale. That’s what they’re incentivized to do from the owners, from the investors, et cetera. We need to create that context where the team gets the right incentive. So leadership needs to play that role. That’s really the leadership’s role, but then the actually living that culture comes from the bottom up.

So, here’s an interesting conversation I had with Scott Anthony, great thinker. And I was talking to him for our new book. I was asking what about the enablers that you see? What do we need to put in place? The cultural enablers for innovation? And he said, well, there are a couple and gave me some articles that they wrote. He said, Alex, probably innovators want to innovate. But the problem is there too many blockers that are holding them back. We require business plans from people with a new idea. That is the enemy of innovation. The business plan is the death penalty of innovation because you’re forcing people to sketch out a fantasy and build an implementation plan for a fantasy.

You’re going to maximize the risk of failure with business plans. Let’s kill those and give them the right incentives to do the right thing. So, it is leadership’s role to do that. And that’s why I like to say a leader needs to spend 40 to 50, to 60% of his, or her time on innovation for the organization to take innovation seriously. So, I call it the Rita McGrath test, Columbia Scholar, good friend of mine. She says, look at your leader’s agenda to know if he or she is taking innovation seriously. And I would add if it’s less than 40% innovation, breakthrough innovation, not going to happen in that company.

Brian Ardinger:  If companies are trying to figure this out, do you recommend them starting to explore investing in startups and that. What’s the way that a company can say, okay, we get the concept, we understand, but we don’t feel like we’re in the right position to execute immediately. What are some ways they can make that happened?

Alexander Osterwalder: Yeah. Great question. I actually think, you know, the direction of, Oh, we’re going to invest in startups through a corporate venture capital arm. Bad idea. If that’s the only thing you’re doing. I’m not saying it’s a bad idea per se, but if that’s what you’re doing, it’s not going to work. The other one is build an incubator. Well, look, every company has a lot of innovation activities, but as Steve Blank, Rita McGrath and myself, we call that innovation theater. Yeah. A lot of activities that don’t work because it’s not strategic. So the number one thing, before doing anything else, is give innovation power.

That means either the CEO spends, you know, over 40 to 50% of his or her time on innovation or you create a co-CEO. So Ping An is a great example in China. They, this is a banking and the insurance conglomerate, the founder, Peter Ma, it is one of the top 400 companies of the world. The founder, Peter Ma created the position of the co-CEO. Hired a lady called Jessica Tan to push innovation. Okay. All, you know, explore area. So, he gave innovation power. That’s the number one thing to do.

And then how you implement innovation infrastructure. Do you invest more in startups? Do you do more homegrown? That is a choice. You need to understand the options. There are many things you can do. You can invest and then acquire. You can experiment, learn, and acquire. Or you can experiment and grow. Every company will have a different strategy. And that strategy also needs to be very clear. Ping An, they did a lot of home-grown stuff, a few investments. They did some, which were very successful. Tencent, they did mainly investments or Alibaba. Amazon, a lot of homegrown, right.

There is no right answer in the sense of here’s what works. Anybody who tells you that is a charlatan. It doesn’t work that way. You need to have a very clear strategy of how you’re going to do it. The thing that is clear across the board, you need an exploit and an explore culture, doing everything outside, not going to work. So, I remember projects we were doing with Bayer, a pharmaceutical company. They said we should actually mix internal teams and startup teams earlier on at least, both, right. So, I wouldn’t go for one or the other. I would go for a very clear strategy that works for you in your context.

Brian Ardinger: All right. Let’s open it up for questions. Anybody out there in the panels have a question, feel free to put it into the Q and A or the chat and I will get it answered here. What are your thoughts on venture studio models and how corporations leverage that expertise?

Alexander Osterwalder: There are a lot of activities and the activities per se are rarely wrong. The challenge, I would say with venture studios, with accelerators, incubators, investments is if they’re not part of the core strategy. I’m not saying innovation strategy, but the core strategy. It’s not going to work. It’s not going to have an impact. You’re going to have homeless ideas coming in and homeless ideas going out. A lot of the challenges, actually, that companies don’t scale the ideas that they found and actually de-risk.  I would say, you know, whatever activity you do, integrated into a clear strategy, we call this portfolio guidance.

So, the leadership team, needs to create a very clear portfolio guidance, strategic direction, organizational design, brand image. We call that the corporate identity and that needs to drive your exploitation activities. That what you’re managing, what you have and your exploration activities. And then whatever you do, we’ll be good, right. Because you know, again, there’s no magic answers that you need to do this. You need to do that. But they need to be integrated into a strategic activity.

The reason why I’m emphasizing that is because that’s the biggest problem. The problem around which activity to choose is smaller than the problem that these activities are not integrated and inside of a structure where innovation has power. That’s the biggest challenge in 90% of the companies I see.

Brian Ardinger: I think the more you do that, the more you create that culture of experimentation de-risking things, failure, quote unquote, is okay. You know, not failure from the standpoint of doing the wrong things but learning that your assumptions aren’t always right. Those are some of the things that I think eventually can start that flywheel moving.

Alexander Osterwalder: Yep. And it needs to really, you know, as a leader, you need to create the conditions for success. Showing that innovation is important. It’s in the top management meetings. Creating incentives for people to actually experiment. Here’s a good example. Jeff Bezos publicly saying to his shareholders, Amazon is the best place in the world to fail. And he doesn’t mean when you build a new warehouse, he means, right. Guess why he is saying that? Because he wants to attract innovation talent. So that comes from the very top. Leaders create the conditions for innovation to flourish. Leaders should not pick the winning ideas for that you build an exploration portfolio. That’s exactly what they do at companies like Amazon or Ping An. World-class innovators, build exploration portfolios.

Brian Ardinger: What would be the recommendation for research-based early stage company to make sure that they are on the right path for innovation?

Alexander Osterwalder: Steve Blank launched an amazing movement with the iCore Movement. You know, the National Science Foundation in the U.S. started applying these methods, mixing customer development, lean startup with Business Model Canvas and Value Proposition Canvas, to help, you know, scientific people.  Really some of the smartest minds on the planet. To keep the right business mindset together because sometimes a little bit of a misconception of what business is. It’s accounting. It’s finance. No it’s two things actually at the core. Creating value for customers, right, and then creating value for your organization. You need to think about that from the beginning.

You might have a scientific invention at the center of that and then create a product, but again, it’s just a product or value proposition. That’s not a business. A business is something that makes more money than it consumes. So what sounds trivial is not baked into these research-based companies that have been more scientific or technology mindset. From the start you need to think Business Model, and then, you know, just for the philosophical part, value for customers value for your business. And if you really want to be a world class company, you’ll immediately think about value for your team and value for society. Right. So I want to bring those out because I think more and more startups actually are thinking like that. More and more corporations.

But back to the research, you know, early stage, even scientists, the customer development you do, the testing in the market will actually inform your research. And I remember a couple of neuroscientists saying, wow, through this iCore program, I’ve saved years of research because I would have gone off into the wrong direction. So what I would also add to that is scientists actually have a very good foundation to do this, right.

So, I work a lot with huge pharmaceutical companies across the world. They’re all knocking on Strategyzer’s doors. Interesting. Business model has died. They actually have everything they need. The scientific mindset of having a hypothesis, testing it and changing it until they figure out what works. It’s even, you know, to a certain extent you could say it’s easier in social science because we don’t need to be as exact and the numbers I said is 250 to one. To find a new molecule it’s thousands to one. It’s actually a lot harder to find a new molecule. So the question is why can’t pharmaceutical companies innovate beyond molecules. Because they don’t apply this mindset to business. And this is exactly what research-based companies need to do is think business R and D, think business R and D.

But very long answer because I’m passionate about it. Because pharmaceutical companies not being able to do it yet. But I mentioned just one already, Bayer. We worked with them. This is a public case. Doing it, but we have another five in our portfolio working with us. They’re all on the path towards this and startups going through NSF, the National Science Foundation program do this as well.

Brian Ardinger: The question from Jason Williams is Alex, thanks for sharing today. Great stuff. As you’ve been studying companies from across so many different industries, what is emerging during this crisis that gets you excited about the future?

Alexander Osterwalder: Again, what gets me excited? Like what I said at the beginning, this is a huge opportunity because I don’t know any company that hasn’t been disrupted right. In one way or another, some positive, which is also good, like Netflix and Zoom. But then others very negatively like Airbnb. So, there are a couple of positive things. First one is everybody now needs to deal with disruption and there are companies who already have structures to deal with this, and they are rewarded for having done this upfront.

And the people who helped build these structures are going to get a higher profile in the company. So they’re catapulted to the forefront, those who built innovation infrastructure. Those who haven’t now are waking up. Right. So, they have to. I remember just before the lockdown being with one of the biggest financial institutions in Europe with the CEO and team. And so, and you know, there was a hesitation and, you know, disruption was still pretty vague. They knew it was coming. But then we talked about Ping An, you know, as an example of a company, that less than a decade ago, they made this shift. Now everybody’s waking up to make this shift.

The other thing I’m excited, excited is the wrong word, but there is a certain punishment of those companies who just in quotes bought back shares and, you know, just focused on Exploit, paid huge bonuses to managers and leaders who didn’t even create value for the company. And again, I’m not happy about that. But I’m happy about the fact that this is now become very visible. You know, we see the other side.

Again, you know, mentioning Airbnb as an example of a company that also had to go through something very tough, but they did in a very decent way. So, you can see the great leaders emerging and they’re now visible. Just like you can see the terrible leader. Everything is amplified. Right? Great leaders. And terrible leaders and I’ll stop my comments there. I won’t get political, but we can really see the difference between great leaders and terrible leaders in a crisis like this.

Brian Ardinger: It’s like that old saying when the tide goes out and you see who’s wearing a bathing suit.

Alexander Osterwalder: Warren Buffett. And by the way, taking Warren Buffett as an example, what’s interesting. And this makes me think about the crisis now. Berkshire Hathaway has a lot of cash on the side. And normally, you know, Warren Buffett would invest and buy companies, but even Warren Buffett is now not buying assets because he says it’s not clear where the world is going. So, it is a difficult time to make decisions and we need to be very careful. And that’s why I think all this whole experimentation is important that we keep that in mind. There are things you can learn. Well, we can’t learn. There’s nothing that will help us with experiments is where’s the economy in 3 months, 6 months, 12 months, 18 months. But you know, you can, good management will be able to deal with that.

Brian Ardinger: I think we have time for a couple more questions. Question around…have you seen any case studies or examples of companies that are startups or otherwise that have done a good job in the last two months of pivoting or, or looking at different ways to explore and exploit?

Alexander Osterwalder: We’re doing a little bit of research and I don’t have the names of top of my mind. Getting old, have memory loss, but I remember the context. So, there’s a Japanese office. I think it was office material company. That made an interesting pivot very quickly and saw COVID-19 as an opportunity in the sense that in Japan, apartments, lot of people live in apartments, not in homes, in houses. The apartments are very small and the rooms, you know, are there’s a lot of shared space and the individual rooms are very small, right.

So now if you have to work from home, may be difficult, like even more extreme than in most cases, you know, in the Western world. So, this company created from scratch, tents that you could use as an office tent and isolate yourself. And what’s amazing is how fast they did this. Right. They immediately saw COVID-19 as an opportunity in the crisis and they pivoted very fast. I love that example. Yeah.

There’s another one, a Chinese example. I really can’t remember the name of a company that launched a new multimillion-dollar film. It’s an really expensive movie. And they couldn’t distribute it through theaters. It’s the American example, which we all trust. But, but in that case, what they did, which was very interesting, is they work together with, and social media provider to distribute the movie in smaller chunks, right. They really thought partnership very quickly and they didn’t just go direct.

That would be in a different option, but here’s the thing you can’t just go from, we use the distribution to going direct because you don’t have the reach. So, it was a very smart, strategic direction to say we don’t have that clout. Let’s sell the movie for, I think it was $600 million, something like that, a big number. They would sell the rights to a social media company who would then take care of monetization.

So, there are a couple of interesting pivots like that. And, you know, in some cases can be very hard airlines, well, stop not much you can do. But you know, I think also with airlines, what we’re seeing is now there, Scott Galloway, you know, we know he talks about that a lot. Right now, they’re giving it, they’re holding their handout. Because they weren’t careful before, again, it’s a difficult industry, but you know, it, it’s crazy what kind of behaviors we see from some leaders and from some corporations out there.

So again, I also think we see the great corporate citizens and the terrible corporate citizens now really emerging. That’s the positive side. Those that are doing good work. Now they can show it off. Those are doing terrible work, they’ll be punished. Because again, we need to protect the jobs that people, not the jobs and the companies. That’s how capitalism works, but we need to also protect the people, but that’s not always the case.

Brian Ardinger: We’re running up at the top of the hour here. You’ve been super generous with your time today and everything that you’ve done. And Strategyzer has been very generous with a lot of your tools that are available for folks to download and that. But if people want to find out more about yourself, about the book, I’ll show them up right here in that, but what’s the best way to do that?

Alexander Osterwalder: I’d just type strategyzer.com. And the reason why is because for every book we wrote, so the four books we wrote, we give about a quarter away for free so people can get a tease. Right. I believe in the freemium model, have a look at that. We give all of our conceptual tools away so people can use them. So, we want these tools to spread. And then, you know, we build technology enabled services on top. We target, we mainly work with large organizations, so we want startups to use all of this stuff. Just go there and do that. And then, you know, a lot of YouTube talks now. There’s an inflation of conferences. So actually, lot of good stuff out there. And then, you know, podcasts. So, go to strategyzer.com.

Can you send them to Tendayi Viki’s talk and to David Bland’s talk? Because two of my colleagues were on the show as well. So, I appreciate that. Thanks for that good work. And because we want to share a lot, right? We want people to do better work. That’s our mission, help people do better work. Tell us what’s not working and what you need, and that will help us for future books and work.

Brian Ardinger: Excellent. Well, I appreciate everybody coming on Inside Outside Innovation Live. Please follow us on social media and go to InsideOutside.io for the list of podcasts, all the stuff that we push out on a regular basis. We have a number of IO Live events coming out throughout the rest of the month. So please check that out and again, Alexander, thank you so much for being on Inside Outside Innovation. It’s been a real honor to have a one on one conversation with you and to share that with what we’re building out here in the Midwest and other places. So, thank you very much. That’s it for another episode of Inside Outside Innovation. If you want to learn more about our team, our content, our services, check out InsideOutside.io or follow us on Twitter @theIOpodcast or @Ardinger. Until next time, go out and innovate.

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Episode 206

Ep. 206 – Alex Osterwald...