Alex Osterwalder's keynote at the Thinkers50 European Business Forum 2018 in Odense, Denmark

so 20 years ago two guys got together at the University of Lausanne and I'm delighted that both of them are here today so Alex started studying for his PhD and his supervisor there was Eve and from that came a book which probably exists in almost every boardroom across the world today perhaps a tool which is used by more business people than anybody else and a series available switcher and follow that I thought she asked in Alex which is the next book which will which you'll be writing and I was expecting some real academic blockbuster and he said at Lisa it's a cartoon book it's a cartoon book for kids and he's actually lighting it with his two children who were 12 and 15 years old so look out just in time for Christmas when Santa Claus is coming for biz for kids with a Z so please give an incredibly warm welcome from Lausanne in Switzerland to Alex Osterwalder [Applause] okay good morning so we're going to talk about invincible companies so even I do believe in our entire team at strategize we do believe it's possible to become invincible if you proactively innovate all the time and obviously the theme here is impact sustainability you know asking the right questions and making the right decisions I'll expand it a little bit to creating invincible companies that also have a positive impact in the world so we're gonna look touch a little bit on our older stuff business model canvass value proposition canvas but most of the time even I Eve over there it's gonna be on the floor we're gonna get you also to work a little bit on some of our very new stuff actually so new that comes from last week so you're getting really the new stuff that will be in the book we're publishing in November next year after the comic book which you'll buy for Christmas for your kids as Peter just told you good okay so and we also have the pleasure to have Holger who will visualize the session on the screen will send out the visual notes and the slides to you after the event so you get a little bit of the capturing Holger is really focusing on making strategy tangible through through a visual tools okay most of my time I spend as an entrepreneur so all of this stuff we do I try to make it very practical now I want to start framing this with the leadership challenge it's actually pretty hard to innovate who have you ever tried to innovate ends up okay everybody else can be out of business in a year too who of you finds innovation actually breakthrough growth innovation pretty hard it's not that easy to put in place in your companies okay so that is the case so I'm going to just quickly if we can switch to the iPad please draw the life cycle of a business we can switch to my iPad from the great excellent so-so all the messages coming out basically any business starts with an idea any business even if you're hundred 150 years old starts with an idea something you think is worthwhile pursuing and you're trying to turn that into a see if my visual skills are as good as holger's over here anybody know what this is people often say it's a ship what yes no it's a 1 billion dollar or euro business and now you're not supposed to laugh but ok there's so much my drawing skills so traditionally when we go from idea to business as a startup or as an innovation or corporate venture inside a company what do we traditionally ask the team to do in particular still in companies we ask them to make something like this a business plan ok and a business plan always has this wonderful curve the hockey stick curve ok looks like that and it's pure fantasy now here's the thing who's ever written a business plan hands up for a new ideas any of you spend more than a week writing a business plan hands up ok that's the best way to a waste your time but worse to maximize the risk of failure because basically what you're doing when you write a business plan for a new idea is you're writing about a fantasy in detail and then you're going to make it so convincing look so good that you're going to invest money into a fantasy and implement a fantasy now what's the problem with that innovation looks more like this it's ups its downs we make progress okay then we regress because customers say they don't like what we're doing we make progress again we as we learned then you know the company makes a bad acquisition and you get your funding gets pulled never heard of that ok regression may be a bit progress and then ultimately if you make it if you get through this difficult journey and survive this graveyard rest in peace of corporate ideas then you have a business okay and then you start scaling and you get better and better at it this is a real journey of exploration we call this the Explorer phase and what are you doing the Explorer phase you search for value propositions that customers want and for business malls that can scale and that's very hard and that's what entrepreneurs and innovators do okay and it's a very difficult journey but once you have a company so who of you is in an established medium sized or large company in this room hands up and I'll put government like cities in there as well okay good so once you have a business model and I'll just brought draw business small canvas as a in the placeholder you don't explore anymore you don't explore anymore because you've found the business model what do you do you exploit or it could call it you manage okay you manage an existing business model and here's what happens is that we kind of forget this phase here because we're not explorers anymore so what do we focus on we focus on exploitation and management we get really good at it we have really good processes we do cost-cutting we get better and better and better at it we have KPIs to manage really well and that's good it's all good but here's a problem we forgot to do this for not it's not in our DNA anymore and we apply the kpi's of this to innovation we ask people to make business plans and predict the future as if it was an implementation management problem but it's not it's a search problem who have you has ever seen an organization that applied the rules of execution and management to innovation with a negative impact who've seen that okay rhetorical question is 90 percent of companies work that way so what we're gonna look at is how do we stay world-class at this and man our organizations well the portfolio of existing businesses but at the same time become good at exploration again so if we can go back to my slides please we want to manage these two worlds and that's what academics often call the ambidextrous organization we're world-class at execution and were world-class at innovation but it does mean two cultures two sets of metrics may be very different skills under the same roof most companies are pretty good at execution and management business schools are very good at teaching that but what we also need is world-class innovation world-class exploration so it's almost like creating a Silicon Valley without the bad sides within an organization ok now let me bring this back to impact so it's already difficult to innovate but now the best companies they go even further and they say we want to innovate we want to create growth but we won't don't want to do it at the expense of society and at the expense of the environment so I'm going to show you just a little video of Paul Polman CEO of Unilever because what they're trying to do there is to innovate to grow and satisfy shareholders but without having a negative impact on the world so what we're gonna do over the next 80 minutes or so is figure out how to innovate but always keep this framing in mind we're gonna add an additional constraint to profit profit in harmony with impact not at the expensive not CSR but profit in harmony with impact so let's listen to paul pullman so we believe that an equitable and sustainable growth model does not have to come at the expense of either top or bottom line growth in fact if that is your strategy I would submit it actually accelerate sort of a bottom line growth and that is what we're trying to show and so far also it was our shareholders which is one of our stakeholder groups we've translated that into reasonable return I personally believe that more so in this weapon in any other world that we we live in companies that are in tune with society are closer to the needs of the population at large after all we're a consumer goods company our better place to be successful and that is the essence of this model it's a growth model ok so inspiring right and Unilever has stuck with this for a very long time and since bubbleman's start 2009 with this vision and one of the big things and that's why I picked Paul Polman and I was reminded of what they were doing at Unilever by Roger Martin who was gonna speak later today said I'll often I hear from some of the big clients I work where they say we can't do this the shareholders want dividends they we can't focus on growth and impact and all of that well in their case they're trying to continuously repeat this message we're in it for the long term we're in it for sustainability if you want to be a shareholder at Unilever that's what you're dealing with so they're trying to change the shareholder base so it is possible it's very difficult and will ak4 talk about Amazon also they're changing that or they from the beginning they changed the shareholder base to think long term and continuously that's an innovation ok so we have this dual world here uncertainty is relatively low we know the customers we know how to reach them we know the market ok low uncertainty here where we're trying to explore high uncertainty new ideas maybe new markets maybe new business models so the three types of innovation and I'll steal the ideas here from Clayton Christensen and team three different types of innovation over here we have efficiency innovation great that's good it's important better processes get better ways of doing things but the things you already know how to do if we take Unilever what did they do there they said not just more efficient effective processes but also processes that have an impact positive impact on the world so they replace their cooling boxes for ice cream with freezers that have a positive environmental impact less they're a lot less negative than what we have today because ice cream you know has a hint carbon footprint that is crazy so they focused on that efficiency innovation that improves profitability of an existing business model and has a positive environmental impact great now that a lot of companies are pretty good at doing at least the cost to have efficiency Unilever brings in and I think they're world-class at it the sustainability impact then we have sustaining innovation is just about replacing what we already have with new products and services if I'm recetas and I have an old series of cars and making new cars that doesn't create a lot of growth is just sustaining if we take Unilever and we take the impact aspect to your social impact they came up with that surf Excel quick wash a new washing powder that is replacing an older generation so it's just sustaining right it's still selling washing powder but they said well we don't just want to make a new product that's better for customers we want one that is also better for the world so in India China and other regions of the world still a lot of hand washing going on a lot of water is used so they said how can we reduce the consumption of water when people are hand-washing so they launched a new product that is great for customers but also reduces the negative environmental impact of washing so they reduce the water consumption by half pretty amazing a sustaining innovation replacing old products with new ones in this case with a positive environmental impact and now I tried to search pretty hard for growth innovation spectacular breakthrough growth innovation new business smalls at Unilever and they're not really there yet and I realized that because I talked a lot with Unilever people we don't work with Unilever yet but I talked with them a lot at the Lean Startup conference and they're going towards that direction so the examples that we have today are maybe less in the environmental impact area but to illustrate the idea of innovation think of Amazon Web Services a company that is in one industry but breaks out to create growth in another but it doesn't matter new industry new business model strong synergies with the old one so what we're gonna look at is how can we manage the entire spectrum so what we're gonna do in the next 70 minutes now I guess is we're gonna work a little bit on creating this entire portfolio of innovation so summarizing we have business process innovation over here great we need that that a lot of you I'm sure you're working on new social channels digital transformation digital marketing digital channels fine great I'm sure a lot of you have R&D who of you has any R&D going on in your company ok R&D is not innovation its Rd I'll show you that one myth that we need to bust an innovation people say ah innovation is expensive I can't invest in R&D well have you ever tried to out-compete others with inferior technology who's ever thought innovation equals inferior technology anybody in the room done that well look at this company Nintendo with a Nintendo Wii out competed everybody else with an inferior technology at the time the technology platform was inferior to Sony Playstation 2 or the Xbox what did they do they use the technology called motion control which was off the shelf and they created the Roger Federer feel movies ever played with a Nintendo Wii they had a Roger Federer feel okay you're not hardcore gamers you're casual gamers so they served an underserved market casual gamers the new value proposition to create an insanely profitable business mall for a decade anybody have you ever thought of innovation by using inferior technology I mean you know what Nintendo is doing now Nintendo labo with cardboard that hooks on to the Nintendo switch they're innovating so they're gonna make billions of dollars from cardboard amazing no so innovation does not have to be driven by technology it can be doesn't have to be okay so what even I believe in a lot is that the real potential that we can unlock is a new value propositions a new business muscle talked about that quite a bit it does require that we manage our companies and organizations in a different way and then we add on top the sustainability layer or social impact layer that requires a pretty substantial transformation of how we manage our companies so very quickly I want you to discuss in groups of two maximum three get you to start thinking and working for a minute how do you innovate in your organization today and do the different types of you know areas in your company execution and exploration exploitation explorations do they work in harmony or are the Explorers you know constantly being shot down by the executors okay so quickly one minute discussion let's go what kind of innovation do you see in your companies today one minute one minute okay okay do we agree on something let me ask you four at first when I ring the Swiss digital Rolex here and a lot Rolex can we continue together working hands up if you're fine with me being a rude timekeeper hands up if you're okay okay good so most of you are okay the other ones will just follow okay good I always have to ask first you sometimes people tell me you can't do this is rude you know this is we do this for the cows and the goats but it works so bad Swiss joke I told you yesterday Swiss are really bad at humor so I always try and never succeed but that's okay so what we're gonna look at now is okay innovation different types of innovation but what if we kind of cluster this into different portfolios and we look at two types of portfolios but the overall idea is we're gonna try to look at a business small portfolio existing businesses and new ones so we believe pretty strongly at strategize er and with Eve that shared languages are important to visualize difficult concepts like business models organizational culture so we can better work on it assess and improve okay and we're going to do that a bit and the first kind of tool that really took off in the world used by millions of people is the business model canvas so who have you ever heard of the business model canvas hands up a quick repetition for those who haven't is a simple tool to visualize any business model who are the customers we're targeting how are we creating value for them how are we reaching them through which channels once we're in relationship with them what kind of relationship do we have Amazon is automated or Google a private bank would be a lot more personal right or long-term short-term okay then once we know what value we're creating we ask how are we capturing value value we create how we capture value what are people willing to pay for and how so that's what I like to call the front stage then we have the back stage what are the things we need which assets do we need a brand do we need factory do we maybe need other things like our D okay then we have the activities what didn't we need to be world-class at is the manufacturing is it maybe marketing selling or the key things we need to be good at and obviously we don't do everything ourselves in the 21st century we work with partners who leverage our business model and once you know this kind of what I like to call backstage what happens behind the curtain we know the cost structure so it's like an equation what value do we create how do we capture value front stage but then we need the backstage to create that value and that gives us the cost and ultimately business even government needs to bring in more money that they spend some governments sometimes get that wrong like Greece or Ireland or so sure the Danish get this right okay so this is more canvas quick illustration is going to use this afterwards to see transformation of businesses some of you have probably heard of healty okay company that makes light machine tools for builders was traditionally a manufacturing company medium size bigger medium size global player so their business small pretty straightforward I'll keep it simple high-end machine tools for builders sold through a direct sales force some stores but definitely created a direct one-to-one relationship with the customers key account management and always the same people dealing with the same customers transactional sales as a revenue stream okay so they have to sell again and again and again they have to do product innovation to keep that going what do we need to have in the back stage to do that typical manufacturing company we need to have factories patents brand name key assets what do we do we manufacture and we sell and then maybe we work with some manufacturing partners it gives us the cost structure of a manufacturing company okay so now you know how to use the business small chemist very simple tool and we'll go a little bit further to ask ourselves okay if we have a business most we have this business model how can we improve it how can we make it better to make more profit or to have impact in the world okay so what we did here with the vit with the business mall cameras was visualized the business model now let's look at a different problem or different challenge if I'm a senior leader I'm actually not managing a business model but I'm probably managing a collection of business models even a small firm like strategize er has a collection of business models some more profit some less profit so we're just gonna kind of classify these on a traditional and a two-by-two okay you have good profits or profitability on top lower profitability at the bottom and then here we have risk a very protected business a great business small that can't be disrupted over here weaker business that prone to disruption or still emerging over here okay two by two like any good consultant would do we need to have an arrow that goes to the top right from the bottom to the top so your strongest business smalls in your portfolio or up there and you want to keep them up there so there should be a continuous effort to get your business model up to the right but inevitably what's the life cycle of a business well it starts here emerging then we make it better until it is really strong and contributes to our organization to our company but what inevitably happens people tend to forget that businesses die like people so we have to proactively give birth to new businesses or kind of take a lot of vitamins so we can get it back up there okay so this is just the idea of a portfolio in a general way we're going to look at one and then go into innovation and exploitation so let's take Nestle biggest food company in the world and if you look at their annual report of 2014 you have the profitability of their business so we're not placing them on this axis yet just on the profitability axis okay over two years profitability changes a bit some grow some shrink okay some acquisitions good existing business portfolio question to you is if you are at your table group maybe you split if your lunch table you split in two groups you are now the top management of Nestle 100 billion dollar food company biggest food company in the world your task is to look at your portfolio and ask which one is most at risk of disruption right so we're gonna work on this axis which ones are most protected but what I want to know is which one do you think is most at risk of being disrupted that Nestle should act on in 2016 okay so click one minute exercise I'm gonna put up the portfolio again ask yourself which one of these businesses is most at risk okay let's go one minute see who figures it out I have Swiss chocolate for the team that gets it right okay let's go okay okay let's see let's see who got it right I'm gonna kind of come down here okay maybe the table over here which one do you think is gonna be disrupted oh you guys know you can't hit all of you know over here okay what do you think which which business is at risk of disruption milk products why so milk Rana okay okay so decreased in profits right on the border okay see um could be could be anything else what do you guys think which one okay pet care why pet care people they buy pet care for the food for the dogs okay online okay so other competitors that are better at online than this live on subscription base right so competition disruption by competition pretty else over here you guys think what it came up confectionery why so okay that chocolate goes to this team so here's the sugar for the business that's disrupted by sugar now here here's why so here's why because in the United States is a huge backlash against unhealthy products in particular sugary products so what Nestle was fearing is that the regulatory environment changes so much that it'll be harder to survive in this business so disruption by regulation you can be disrupted so a little bit of a trick question right disrupted by technology competitors but also by changing regulation you need to stay ahead of the game so what nets they did is they sold their business in the u.s. to Ferrero who knows what they're gonna do when the regulation changes so they got out of chocolate in that case okay so think about disruption of your business model so they sold the business and working on their portfolio what they focus on really where they think the growth is in health and nutrition okay so that's the portfolio idea now let me get a bit more precise around portfolios we think there are two portfolios and companies one about existing businesses like we've seen that Nestle and we're going to show you how you can work here but the one we really want to focus on because we're talking about innovation is over here how do we work with our portfolio of new ideas and projects and turn some of those into businesses now the logic here is very different here it's about efficiency and cost-cutting here it's about growth here in fact investment philosophy is different we're talking about dividends okay the shareholders want quick returns here we're talking about growth and VC style investment which is very different you'll see that not every project is going to succeed you need to accept that some are going to fail and you need to have the failures to create the winners if we look at the cultural processes here it's about linear it's about execution rigid processes people who can think rigidly that's good over here over here that's bad we want people who can deal with ambiguity entrepreneurial people people who might leave a company to become entrepreneurs but you can keep them because you have a great ecosystem to let them thrive so the people skills also very different the people here are detail-oriented the people here look at the big picture so it's very important very important that you understand there's a difference and the way we work in both spaces is very different so the way we deal with an execution or exploit portfolio and an innovation portfolio is very different okay we're gonna start with the explore portfolio how do we deal with new ideas new ideas okay so we're gonna go into this field here we're going to use the same axis with a slight modification so there are two things we need to pay attention to when we look at new ideas the risk that the idea is going to fail and the financial potential and then we can add an additional constraint which would be the impact in the world like we've seen with Paul Polman okay so if we look at the risk we might want to look at do people want a desire feasibility can we actually build it and viability can we make it work financially what do most companies focus on what do they do most what is R&D do can we build that thing what should we do more of do customers actually want it you know the statistics 7 out of 10 new products and services fail 7 out of 10 actually you can look around you at your tables if you're sitting at a table of five or six or so four of you are working on something nobody wants look around you put a hat put your hand up if you're working on something nobody wants ok some of you might be honest ok it's not because people are not smart it's because they don't manage their portfolio this way ideas start out it's very risky we see how it's gonna make a ten million hundred million a billion but we don't know so we need to accept that that's expected profitability so we test our ideas to decrease the risk of failure but what we also need to do is improve the expected return by improving the business model or what we could do in this axis is say return and impact ok so we need to think about the design of our business model when we test so let's go into this very quickly we're taking espresso as an old example we use but so long we can learn from it Nestle was a b2b company it still is but then with an espresso they started to become directly business to consumer ok there's a big shift for them when they launched an espresso now came up with the pods with the machine and they made great espresso this is how the story kind of worked out in terms of risk the inventor Erik favela came up with the first business small around the Machine same technology didn't work the business mall was flawed they almost went bankrupt they put him gently back to RD hired a new CEO jean-paul gaya who came up with a new businessman Silicon Valley speak that's the pivot right now much longer than we now do today because they almost went bankrupt but there are they experimented they figured out what could work with direct-to-consumer and they started investing more so this idea became more more tested better and better and they started investing okay so question is and if we can start distributing the the portfolio maps Nestle came up with one Nespresso in the last 40 years what did they do wrong well the thing is that you need to invest in many projects or in some projects to create one outside success so I want you to do a little exercise in groups of two or three obviously Swiss chocolate involved okay access to heaven is the other word for Swiss chocolate so the question to you is how many projects would Nestle have to invest in a million dollars how many million dollar projects would they need to invest in to create one out sized success so if you put two it's two million dollars if you put a hundred it's a hundred million dollars okay how many projects do they need to invest in that's this the one up here then you need to decide of these projects if you put let's say ten how many of these ten projects will be just complete failures like complete failures all five or six they're gonna bomb how many of those ten actually will have some success maybe they you know and create a 50 million dollar business or a hundred million dollar business but it's not a billion dollar business not a growth engine okay so I want you I'll give you a minute to fill out the numbers and the team that comes closest to the correct numbers gets some Swiss chocolate okay let's go one minute to figure it out okay okay let's see let's see let's see so first thing sorry this is completely new slide deck I didn't actually introduce right there's there's two portfolios you have the explore portfolio we have some ideas will bomb and you have the exploit portfolio so new slide deck sometimes a little glitch okay so you see the whole thing right away when did you come up with numbers who wants to win it's a bigger box more heaven okay oooh hundred I heard 100 over here 100 ideas okay I need anybody else want to compete for okay you said 100 you have to have it written down anybody who didn't write it down okay 20 over here we have 20 at 14 will bomb and 5 will know some success anybody else want to compete yeah over here 18 okay 67 will bomb okay yeah 500 okay that's 500 million dollars invested this is a Swiss conservative company you do understand that okay that's good 20 as well 202 is so 200 million investment and how many will fail okay so you say Nestle is gonna accept it 140 million they're flushing it down the toilet and they're fine with that okay okay okay good so we're the guys with 20 who said 20 over here so you're the closest okay so congratulations think they're good at innovation okay give them a hand yeah excellent right okay so why why did I come up with these numbers so it's actually something like 25 between 25 and 116 will completely fail eight will no some success and only one will become a real success now the lesson I want you to take away from this it's very important for innovation breakthrough innovation is you can't pick the winner you can't pick the winner and today in most companies you put money in a project what do we exactly what do we expect from the team that they're going to succeed you're asking every team to succeed but they can't not every team can succeed if you want to get breakthrough innovation you need to accept that a proportion is going to fail in this case actually about 24 out of 25 so where do I get those numbers from I took a proxy number which is early-stage venture capital investments and looking at the return so turns out that 60% of all early-stage investments they bomb okay they don't return capital so 0 to 1 X return I put 100 in I get less than 100 back so I lost money turns out that 25 percent they give you 1 to 5 X back which means I put in 100 I get maximum 500 back and I'm only making up for the losses over here so I'm still at zero so where do the real returns come from where do I really grow is over here could say one out of 25 or four at 100 they give you a return of 10 X 250 X so normally if I say ok we're going towards a billion I should probably be even beyond the 50 X so it's a very low number very low number but the biggest lesson is doesn't matter what the exact number is that depends on how risky the investments are but what you need to know is you're not going to succeed with every project so if you ask every team's to succeed they're not going to innovate they can't so if an entire industry of venture capitalists can't figure it out managers can't either so any company that invests in innovation and success and them expects every team to succeed cannot innovate on a broader scale with breakthrough innovation ok not efficiency innovation sustaining innovation now here's the thing there very few companies who get this like Amazon where they say failure and invention are inseparable twins and Amazon failed a lot because they know they have to fail to create some outsized winners same thing at Unilever Unilever doesn't yet have the breakthrough growth they have incremental growth still they don't have the breakthrough growth that amazon has it would be great if company with those kinds of values would act very similarly to Amazon because then we'd have a real impact in the world which is over if you already know it's gonna work it's not an experiment is only through experimentation can you get real invention the most important inventions come from trial and error with lots of failure and the failures so that's why people we were kids we always hurt each other they were never embarrassed okay so he doesn't say failure is good he says it's embarrassing nobody wants to fail but he also says you have to have failures to have winners so basically it means if we take this Explorer portfolio we need many ideas we meet many teams to get to some that work I can already think some of you are saying yeah this is big company stuff I can't do this in a medium or small size company it's not true because at the beginning you don't have s huge amounts of money you have some teams that get small amounts a couple of thousand euros dollars whatever you want to use as a currency then you give follow-up investment to those who are showing some evidence if you invest in 20 teams maybe only five get follow-up investment or ten of those ten you'll do the same thing and ultimately you'll weed out the bad ideas and you'll weed out the teams that are not entrepreneurial enough because not every team not every employee and team member is going to be good innovator good entrepreneur that's how innovation works breakthrough innovation so you have to invest in failure Jeff Bezos writes in his shareholder letters we are the best place in the world to fail who've used in a leadership position in this room in a leadership position who of you has said we're a great place in the world to fail or in Denmark who has ever said that please fail who's asked your team members to fail a few of you now you don't want to do that when you're building a new supply chain I do it when you're doing innovation okay so what's the reality new ideas in a workshop that we all think are gonna work they're gonna bomb so we test them early we go talk to customers we change we iterate and ultimately we're gonna make it work on a we could put on that scale profitability or impact so a lot of government agency are actually using the portfolio map and they change the words from from profitability to impact so you can use the same thing for impact okay so Roger Martin who is gonna talk later today says well if we really want to change business models if we really want to innovate think in new ways we need to become designers act like designers okay so what does that mean I'm going to show you some very new stuff these are also part of the next book we didn't talk about this at all yet is okay how do we get teams to look beyond technology innovation remember a Nintendo Wii that was not technology innovation it's a product maybe value proposition so first of all it's always about all of the pieces of your business model even a new product you still have a front stage a back stage in the financial equation can bomb great products that customers want but what we're interested in is three epicenters customer driven innovation that epicenter backstage driven in an epicenter how we do things and financially driven innovation and maybe changing the cost structure radically or so so we like to call this business model mechanics so we're gonna go through three business small mechanics I'm gonna do a very quick fire exercise where you only get 30 seconds to discuss something to see if you can figure out what the mechanics are behind the examples I'm going to show you so the idea here is that we want to go beyond product innovation product price service which is already good I mean that's a start but the great innovation potential lies in three areas front stage disruption so we're gonna look at companies that disrupted the world not by product innovation but by disrupting the front stage customer facing things different customers different ways of doing things with customers okay first one thirty Seconds what do these three institutions have in common iPod iTunes Windows echo system and marriage now you're intrigued right what do these three institutions have in common discuss in groups of two what mechanics do they have in common okay let's go 30 seconds 30 seconds what do they have in common okay let's hear anybody what do you think wouldn't have in common sorry religion okay anything else yeah sorry platform long-term relationship we're getting closer switching costs somebody said yeah it's very costly to switch very constant I never got an applause for that comment that's new okay said something about Danish culture I guess okay so the question is how easy or difficult is it for your customers to switch are they locked in or not and locked in is not a said negative it can be positive so when Steve Jobs launched the iPod back in the day he pulled an iPod out of the pocket and said it's the first time you could put thousand songs in a pocket but most people don't know it went beyond product innovation it was actually a switching cost strategy because he knew that if people copy all of their music onto the iPod in iTunes they're locked in because it's gonna be very difficult to take your entire music library and copy it somewhere else who of you has ever copied you know your music back then into iTunes or iPod okay who used bought legally music so see it becomes difficult to switch so let's look at this for a second so the value proposition was thousand songs in a pocket sold to the mass-market over here okay they did need to do some technology innovation and acquired some technology there to make this happen but the real strategy was we get people to put their music into the iPod they're locked in if they want to move on somewhere else is going to be difficult what does that mean we're going to be able to sell iPods and then ultimately iPhones over a long time because customers are locked in this was a switching cost strategy when did these switching costs expire when Spotify launched because you didn't have to copy music anymore you subscribe to a database of music so all mechanics might expire which means you need to constantly reinvent yourself the first thing you can do is assess your business model and ask are there switching costs or when you innovate ask yourself can we disrupt the market by creating switching costs where there are none very intriguing very intriguing okay so we call this one type of front stage disruption switching costs and in the book we're gonna make this a little bit more technical and show how do you need to change the business model to create switching costs and the iPod is one example okay next one backstage disruption a radically different way of doing things to create value for customers next question thirty Seconds what do these three business models have in common IKEA Red Hat Linux and Facebook if you don't know Red Hat Linux you can leave it away if you want it integrated Red Hat Linux created a multi-billion dollar software business based on freely available software an operating system called Linux which was created by the open source software community ok so a minute to figure out what does IKEA Red Hat and Facebook what do they have in common let's go okay okay so who figured it out did you go on silence yeah go ahead do it yourself clothes getting closer okay case of Red Hat Linux a bit different yeah mmm Red Hat Linux it's the open-source software development community there's not they're not customers but it's close its others do the work in some cases the customer in some cases by the open source software community so I'm gonna give you this example I'm sure some of you are on Facebook what you didn't realize is that you actually helped make this this guy filthy rich and a lot of other people in Silicon Valley pretty rich right because you're working for him and his team for free your employees of Facebook you just don't get paid so what I mean with that what's the value proposition people come to Facebook not for the platform but for the content of friends and so-called friends maybe and that content is the key resource that Facebook really needs to take care of so they make sure that their users 2 billion users around the world update their content all the time because that's where the real value is now what's genius about this business model and there's the dark sides but others do the work others create the value because the value is in the content now then people say yeah but this is a digital model eyes Facebook that's not me well like he has a pretty you know physical business model there was a time where people used to buy furniture and now students and young parents they need to make furniture they got others to do the work so it can be very interesting and if you think of credit card companies who does the work in the business model of credit card companies it's the merchants is the customers okay so they get others to do the work so when you think of your business model or creating a new one ask how could I get more third-party partners or some that don't know their partners to do the work okay so we call that scalars companies that figured out how to do things differently to scale a lot faster and in this category you would find Airbnb they scale faster because they get others to do a lot of the work and their asset light okay good so mechanics would look something like this different configuration of resources and activities etc now the last one I want you to think of is profit formula disruption they make profit these companies make profits in a different way so what do these three companies have in common Nespresso we've just seen okay coffee pot sales for those who don't know it it's a software-as-a-service for customer relationship management they were the first to go big on software as-a-service okay so you could subscribe to software and then any kind of fitness chain any kind of fitness chain so what do these three have in common Nespresso Salesforce and any kind of fitness chain and I'll help you a bit because the first thing you're gonna say subscription but there is no subscription to Nespresso pods okay now figure it out let's go 30 seconds 30 seconds okay who figured it out let's see anybody up front investment yeah there's a good one maybe Nespresso a little bit less they have the factories but could be could be yeah some cost could be good idea sorry recurring revenue that's the one I mean there's several aspects right the one I pick was recurring revenue and the reason is recurring revenue is something that's complete again this is not business like rocket science but it's something I don't see companies focusing on when they assess their business model or when they work on new ideas but recurring revenues mean you don't have to invest in sales again and again and again you do one sales and you earn again and again and again meaning if we take an espresso they sold the machines got them into the household they lock customers in so good performance on switching costs once the customers are in the system they lock them in with patents or at least for a long time and then they sell pods again and again and again so they created recurring revenues in an industry that was transactional and that's why I want you to realize the magnitude of this design decision so you look at and say okay so what that's a little change it's actually a multi-billion dollar change because they create recurring revenues in an industry where it was transactional selling coffee and coming back to sustainability we could say well isn't that pretty violent like aluminium pods there was an outcry in Switzerland when they started this so Nespresso had to reflect on how can we change the business model to reduce our environmental impact so now in every village in Switzerland at the garbage collection you find a huge container with thousands of Nespresso pods because they needed to add a design constraint to business small innovation so it doesn't have to be just about profitability that unconstraint but also about impact so ask yourself for every business model you're creating or that you're looking at do you have recurring revenues could you increase the recurring revenues if you already have that's great okay so we call these the revenue differentiators companies that come into a market like Nespresso and earn money in a different way there are a lot of different mechanics I'm just giving you three there were nine here and it looks something like this where we create value but the differentiation is not necessarily just in the new value proposition or product the differentiation is in how they earn money when Google launched search with Adsense that's exactly what they did they auctioned off key search terms they earned revenue in a different way they didn't sell advertising okay so think of this how could you innovate as a revenue differentiator okay now they're about nine different mechanics that we came up with in the research we did the last couple of months just finalized this actually last week so you're getting some really fresh content that is gonna appear for everybody else in the world in a year so you're very privileged to get it first okay cool now we do have some older content that we can readily distribute so if we can distribute the seven questions so this is the older version of our business mall mechanics which allow you they're not going to do an exercise for this one but it allows you to assess either your existing business model or to assess your new ideas to create a better innovation in terms of business mall mechanics innovate beyond the product so why was it so important for us because we saw that most people are stuck in product innovation and we wanted to get them out of product innovation the real potential is not in product innovation anymore I think it's practically impossible to survive with technology and product innovation okay so you can do this follow our blog and you'll get the newest stuff based on us now what we just did is we said okay in an invent portfolios we did say while a lot of ideas are gonna bomb because even if we work on the business small design with these questions we still don't know if they're gonna work so what do we need to do we need to say well this looks great on paper but it's just like a business plan on steroids but we still don't know if it's gonna work so we need to admit we have no clue how many of your team members come to you and say hey boss I have a great idea give me some money but I have no clue if it's gonna work are you gonna give them money you should as long as they have a process to minimize risk they're just gonna go spend it for good dinner's beer and nightclubs or whatever that's not the point so here what you really want to keep in mind is whatever looks great on paper in a workshop session is not gonna survive first contact with customers so the very first thing you want to do is get out of the building so Steve Blank also one of the top thinkers and thinkers 50 made this idea of Lean Startup popular testing ideas as fast as you can so don't work on an idea for more than a day or half a day get out there and start testing because ultimately every idea here is very uncertain to work and sometimes I even like to say ideas actually don't matter what matters is turning ideas into real organizations so what our task is as innovators entrepreneurs or disruptors social impact disruptors is figure out how we can reduce uncertainty of our idea to make it really work and you don't do that by writing a nice business plan or making a nice spreadsheet you do it by testing and the logic of testing is small investments early on maybe in many teams remember the logic you can't pick the winners so you make small investments in 10 20 50 teams depending on the size of your company and then the more they bring evidence to the table the more money you give them but in the next round we call these innovations Sprint's you don't give them you don't give all 10 or 20 money but only the five or so that are convincing not based on the slide deck but based on evidence okay very important so you want to test three things desirability feasibility viability so we did a project with a couple of large and medium-sized companies to said well how could we measure risk reduction how could we create innovation metrics we said well they're basically three types of risks desirability feasibility viability we started using some of the work I think Tendai vicki is in the room somewhere so then I wrote a great book the corporate startup it's also about innovation metrics we took that and said okay how do you make this even more kukri so well if we have these three types of risk we D risk all of this we basically reduce the risk but that's still kind of complicated just too much to big chunks so how do we test desirability we look at the problem we find proof that the problem exists customers their customer has that pain customer wants that gain customers trying to achieve that then we look at the solution can we actually create value for those customers then we look at the acquisition can we acquire them do we know how can we retain them and we look at feasibility can we make it can we manage the technical resources can we get access to the patents can we build that supply chain can we manage those activities all building a brand very different and we get those partners involved and the last one viability can we earn more than we spend so we need to test both from the very beginning willingness to pay by custom of customers in the first 12 weeks we need to test pricing after coming out of the workshop with an idea you immediately go and talk about willingness to pay so when we test all of these things we reduce risk we reduce uncertainty so this is where we're going with innovation metrics measuring the reduction of risk pre-revenue because you admit that you don't know if this is gonna work it's not about the slide deck it's about the evidence to prove these hypotheses we can support them okay so this is a big project we were working on if you want to know more you can go to our little stand outside with a ping-pong table and ask Charles about the innovation metrics so for every team that is working on an project you want them to measure the reduction of risk so I won't go into this it's gonna be a bit more in the book next year measure the reduction of risk to figure out if you should invest in these ideas okay now many of you are say okay well this innovation stuff looks good but I don't have the bandwidth right now I actually want to look at my existing business so let's look at the exploit portfolio let's come back to this thing that we've seen first with Nestle because I just quickly went over okay we can manage that portfolio but we don't just have to invent we can also improve so we're gonna go back to this portfolio and look at the exploit 1 so here we have real profitability real profits that exist or don't exist and at the bottom we have death risk disruption risk which one is prone to disruption and we want to know kind of where to place an idea on this axis this is something we're still working on is a business prone to disruption so we said well let's use the same things desirability feasibility viability for an existing business are my customers locked in other high switching costs if there are you're not likely to be disrupted remember iPod Oh Spotify declining customer loyalty because they don't need to buy music switching cost went down okay then look it's looking feasibility do we have proprietary resources there are a lot of robotics companies in the room yesterday I had the pleasure to meet them blue ocean robotics proprietary resource that others can copy gives me some protection not as likely to be disrupted and then viability do I have stable increasing profit margins recurring revenues etcetera so we can assess our ideas what we're gonna do is something else little exercises I talked a lot now last little exercise I think or second-last we're gonna look at how to improve a business model and we like to call this business model layers you have a business model and you want to work on your business all to go from something to something new so remember the front stage back stage disruption the mechanics so now we're looking at mechanics for transformation business model shifts okay so if we look at the middle we could say well what if we went from selling stuff towards becoming a platform what if we went from product to service what if we went from low tech to high tech or what I really like from high tech to low tech Nintendo Wii Nintendo labo so it can go both ways there's no dogma doesn't go in one direction we could also go from servers back to product okay we're gonna focus on this one product to service and look at an example an example we're gonna use it's gonna show us how we go from one to another so this is a little bit technical just so you get a feel for hey business valuation is not easy you need a practice you need to get the technical aspects right I'm just giving you a teaser an example we're gonna look at is Hill T where we have a company that grew as a manufacturer great everything looked good but then or disruption low-cost manufacturing just creating new tools doesn't make it anymore crisis what could they do and so we're gonna move from selling products to services great okay big trend not so easy to imagine to really make it a breakthrough innovation so they came up with a value proposition which was about not selling tools to construction companies but leasing the tools to them and here's the important part helping them have the right tools at the right construction site at the right time time taking the biggest pain away from the customer solving their headache of logistics okay so that was the value proposition so I'm giving you the value proposition innovation your task now if we can start distributing your task is to ask hurt the innovation new value proposition is service to allow the construction companies to lease the tools and have the right tools at the right place at the right time how does that impact the business model so you're getting the old business model or the one that was under pressure and you're getting some stickers that represent building blocks of the new business model how did the business model transform so it's like putting a tracing paper on top and asking yourself how did the business mall transform so your task now is in two minutes to map out with the stickers the transformation of the business model let's go so you have one business small shift to map out got about two or three minutes should do it not so not so difficult let's go okay okay so let's look at this quickly obviously the service is in the middle okay kind of give you a pointer to that but now it's a little bit like oh they went from a product or service well that has a substantial you know change to the business mall even the customers are serving they're not selling tools to builders but now they're selling big contracts to CEOs of the construction companies and we still have the sales force here that it's the same but they had to re-educate them because selling to builders or selling to CEO is different but what also changes is now they're in constant contact digitally with their customers because there's a new customer interface which is the web because now the customers are not just talking to salespeople but they're managing their own service over a website now here's where it's really interesting for forum healty of course they moved from transactional sales to recurring revenues from service and here's the really interesting part I talked to the CEO two years ago and he said Alex this was so good for us that customers asked us they said you know you're managing the logistics for healty tools but we would like you to manage all of our logistics of all of our tools if you're healty is that okay great I'm gonna manage my competitors tools for you think of it big shift okay that's the front stage but then the step-back stage of course that's a substantial shift in the business model because now they need to be able to manage the fleet around the world that's a different business different cost structure is so different that the CFO at the beginning kind of freaked out and said we're never gonna do this but the experiment and they eventually got there and here's the big thing even accounting wise this changed because now the tools they're not selling them anymore they're in their books okay so they had to change the accounting system to make this work pretty amazing okay so that's a business model shift a transformation has been very positive for healty and what does it mean in our portfolio one for a second well they were able to rejuvenate the business model okay rejuvenate the business model so it's not just about invention it's about your exploit portfolio and improving business models and there's some companies one I can talk about WL gora they make gore-tex they make textiles helicopter cables etc they found this so amazing that all of their business units now work on their existing business models to transform them the senior leaders the business owners work on transforming their business models so you just go back here so again we have customer driven shifts okay from standardization to customization from niche market to mass-market or mass market back from B to B to B to C and we have resource driven shifts we saw asset heavy asset light Airbnb right we have from closed innovation to open innovation from dedicated usage of my resources to multi usage Amazon using their resources for their e-commerce and to build a multi-billion dollar business Amazon Web Services same infrastructure okay and then we have the finance financial driven transformations and shifts we go from high cost to low cost maybe from fixed costs to variable costs so you can disrupt with business mo mechanics but you can also transform with business small shifts but the competition is and the opportunities are in business model shifts think more about the business model don't just focus on technology product service and price that is a dead battle it's very hard to win that one and it's not for very long term okay so let's finish up last couple of minutes with this idea of managing an entire portfolio a business model portfolio so it's all about balance and all about finding your right balance for your portfolio between exploit and explore it does mean of course that you need to put in place the right KPIs of my metrics the right culture to balance this but how does the portfolio look like it looks like this many ideas down here teams that work on ideas and this works even for small companies some ideas that will make it up here once the business is up here you want to shift it up here protect it okay to create a funnel and the funnel looks like this hopefully you have a lot that stay up here but inevitably life cycle they go back down that's how businesses live grow and die and many companies actually don't have the funnel and they end up like Kodak because they don't take business model innovation seriously enough why do I mention Kodak because Kodak was world-class at technology innovation they came up with the digital camera and they innovated themselves to death because they didn't take business model innovation seriously enough and they were not proactive enough so you know that some of these are gonna die it means you're going to create a portfolio many teams working this doesn't mean big investments is it's teams working you invest in the teams that show progress and you know ok some of my business is inevitably they're gonna die I always need to use that flame animation as much as I can it's pretty cool tragic and dramatic I should put a sound effect as well and then you have here I should put the violence right business is coming up from the pipeline that's how Amazon works and that's how altum Utley I hope Unilever will work because they're working beyond just profit they're working on impact but if you want to do that if you want to innovate you need to do that now what we're trying to do with our team again you can ask for more information at our little stand we're trying to put this into metrics because one of the things we do believe is this type of innovation won't be taken seriously if we can't measure reduction of risk our portfolio now we're making progress and ultimately how balanced is our portfolio so we really need to figure out how to measure this stuff as well as we measure performance in the exploit system so innovation metrics big topic for us that we're working on now let me just show you kind of how this looks nespresso we left the story there with invent ultimately became a business moved upwards became the most profitable business of Knisley biggest profit contributor they did during this phase have to think about their environmental footprint so in addition to profits they had to work on the business small design for impact then the patents expired okay so what happens death risk pants expire and you'd think well didn't they know the patents expire of course but they were so preoccupied with growth that they didn't innovate early enough but then over time Nestle did come up with new things not another Nespresso like growth but they did come up with some that that would ultimately move up there and then you heard of Blue Bottle coffee their acquisition of parts of the the Starbucks rights etcetera so they were working on that portfolio now that moved Nespresso back over to the right again so question to you is of course how does your portfolio look like do you have anything that goes beyond incremental improvement today to build that pipeline and I'm not talking technology innovation alone I'm talking about great new value propositions with the right business models okay so you need to work on exploration and exploitation okay both of these and to bring it back to the theme of the conference we should be more ambitious than just focusing on profit so many people already are adding to the profit axis the impact axis and I like it when large established companies do this and say we know that shareholders are focused on short-term we know that they want dividends we know they want growth but we need to transform our organizations to make this happen and we need to build these kind of portfolios that satisfy owners and other stakeholders but in particular have an impact in the world so I I do hope you learn a little bit something out of giving you a last little exercise let's do it as homework how does your portfolio look like is it diversified have you ever mapped it out how could you kickstart more of a portfolio thinking and to challenge you I'll tell you strategize is a small company we do this while we're executing we're thinking about the future building the future experimenting okay so last task take a picture if you're interested in our next book so I do need to do a little bit of sales because you can get we're actually testing something you'll see we're testing the title of the book so this is less about selling this is more about testing the title of her next book so go there and you'll find one of the two options that we're testing thank you very much for your attention [Applause]

Channel: Thinkers50 Europe

Views: 11,976

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Keywords: European Business Forum 2018, Thinkers 50 Odense, Alex Osterwalder, EBF18

Id: 3YBOMqSMoEE

Length: 74min 36sec (4476 seconds)

Published: Thu Nov 15 2018