Alex Osterwalder on the building blocks of organizational reinvention

Think:Act Magazine "Robustness"
Alex Osterwalder on the building blocks of organizational reinvention

Portrait of Think:Act Magazine

Think:Act Magazine

Munich Office, Central Europe
July 16, 2020

To reinvent themselves companies need to divide their world into two: Explore and Exploit


by Neelima Mahajan

Read more about the topic "Robustness"

Swiss business theorist Alex Osterwalder believes that in today's world "business models expire faster than yogurt in the fridge". In order to keep up with the pace of change, companies need to hone the ability to constantly reinvent themselves. Osterwalder, who is best known for creating a tool called the Business Model Canvas (with Yves Pigneur), believes that the only way to keep your business relevant in this constantly shape-shifting world is to crank up the organizational innovation machinery in a way that it actually works and search for new business models when old ones become redundant. So how exactly would that happen and what do companies get wrong? To understand, Think:Act sat down with Osterwalder who most recently authored a book called The Invincible Company. Excerpts from the interview:

Alex Osterwalder believes that business models are like yogurt in the fridge: they come with an expiry date.
Alex Osterwalder believes that business models are like yogurt in the fridge: they come with an expiry date.

How should organizations rethink their competitive advantage for today's world?

Alex Osterwalder: I would use Rita McGrath’s work to start with: there is no such thing as a long-term competitive advantage. What you can do as an organization is copy Amazon if you want to keep a culture of Day One. What gives Amazon a competitive advantage is that they're obsessed by dying. They constantly reinvent themselves. I like to divide the world in a company into Exploit and Explore because they're fundamentally different. [On the Exploit side], you're established, the goal is to manage, to get better at what you do, streamline good processes. It is relatively linear. In the world of Explore you don't know what's going to work. Uncertainty is very high. You try things, you will probably fail, you adapt and you got to do that all the time. We like to call this the search for new value propositions and business models.

Most companies are relatively good at Exploit. They apply the rules of Exploit to the world of Explore. There is no company on the planet probably that doesn't have an incubator, accelerator or does innovation in one form or another. But that's innovation theater. It's not strategic. A simple test is to look at the CEO's agenda. How much time he or she spends on innovation every week? When it's 40% or more, you can say, "Oh, innovation is gonna happen in that company." When it's less than 5-10%, probably not going to happen. Look at the last three big meetings. How much time was innovation on the agenda of the last three important company meetings? If not, not gonna happen. People say we do R&D: that's research and development usually around technology, not innovation. Innovation is closest to entrepreneurship: creating value for customers, creating value for your organization and scaling that. Startups are a lot better at doing that because their incentives are exactly that. [In Exploit] the incentive is don't fail, grow the business we already have.

It sounds like corporations have more resources for their innovation teams. The reality is, it's probably even less than a startup and they're not financed as well as a startup.

What's the problem with incubators?

They're usually not strategic enough. Anything that comes out of there that looks a little bit different in terms of business model is never going to survive. The corporation's antibodies are going to kill it. For example, you have teams that need access to customers to test an idea. Guess what? It's very hard for innovation teams to get access to customers because the key account managers have bonuses based on execution goals. The last thing they want is that you screw up their bonuses because you're going to tell customers: "Oh, we might do this product in a year or so." Why is innovation coming mainly from the startup world? Simply because their incentives are right.

The business model is the unit of analysis, not industry analysis.

You once said that today business models expire like yogurt in the fridge. What is speeding up the maturation and subsequent decline of business models?

Inter-industry boundaries are melting. Which business is Apple in? Hardware or software? Entertainment? So while they make hardware and earn most of their money out of it, they're not a hardware company. They are shifting even more towards other things.

You're seeing these players that come from completely different spaces, unexpected competitors. Think of Amazon disrupting the cloud infrastructure space. An e-commerce retailer becomes the biggest player in cloud infrastructure. They had world-class infrastructure and they decided to start selling that to others. Because e-commerce is such a low-margin business, guess what happened? Their infrastructure is more cost-effective than anything out there.

A lot of what you're saying is also about the ability of organizations to continuously question their business model, their strategy. It's very hard to do that when you came up with that strategy or the business model in the first place.

We need to radically rethink how we're going to select the winners of tomorrow. If you think you know what's going to happen tomorrow and which model is going to win, you're delusional. When you are in the execution space, you invest big bucks into a lighthouse project, expand the salesforce, create another 10 warehouses that you know how to manage. What you don't know is how to pick the next big winner. How does that happen today? It comes from the startup world. Venture capitalists cannot pick the winner. They invest in a portfolio. Bosch and Bayer are two good examples of how this should be done. They invest in many, many teams to explore projects for about three months. And they give them a small budget. After three months, they only give follow-up investment up to 30% [based on] the evidence they bring to the table from testing the ideas. So the teams self-select this. Then only 30% go into the next phase. After this second phase, they invest in 30%. They are creating the ecosystem or the innovation funnel for the winner to emerge.

Exploring and exploiting are two different mindsets, cultures, even, capabilities. How do good organizations manage to do both?

[The answer lies in having a] Business Portfolio Map. In the Exploit portfolio, you map out the businesses you have. Kodak in the 1900s was a small business. [It was] risky. They grew it. Then they invented the digital camera. [It was] innovation suicide [because they didn't commercialize it]. Then comes the camera phone and they die. So what were they missing? They were trying to protect their business model.

Take Fujifilm, the counter example. They started building in the Explore portfolio. Not that Kodak never did that: they were just not obsessed by it. So the initiatives that they undertook weren't strategic enough. The Explore portfolio is the idea world. It has the disruption or death risk, the innovation risk. We need to test and adapt until the risk is small enough. That's this whole idea of a funnel: start with projects and some will bubble up. My favorite example at the moment is Ping An. Co-CEO Jessica Tan's job was to turn a boring insurance and banking conglomerate into a technology player. Chairman Peter Ma was smart enough to say, "You don't know how it's gonna work, go and try, you will learn over time." So they explored so many things until they got here. You need to give innovation power.

Logitech CEO Bracken Darrell spends 40-50% of his time on innovation. Guess what that symbolically tells the organization? Innovation matters.

That's the start. Now everybody is realizing how important separation is. But the best organizations also realize, “We made a mistake separating too much.” So you need to separate and integrate. Management, innovation and entrepreneurship are different professions. Different professions means you need to spend a lot of time to get good at it.

You made a very interesting point about separation. In a lot of companies many times the Exploit part will cannibalize the Explore part. So what should the degree of separation be like?

Innovation as a word is nothing. There are different types of innovation. Let's steal Clayton Christensen's work for a moment. You have 'efficiency innovation': how can I make my processes better? That is everybody's job. Then you have 'sustaining innovation' which might be a new value proposition: same business model, same channel, same supply chain. You can do it within a business unit within the team, because the uncertainties are not as big. But in 'growth innovation', you need a separate space. Here you have a co-CEO or chief entrepreneur. You also need a chief internal ambassador who builds bridges. Growth teams might need to have access to customers. Somehow we need to figure out how to create incentives for the core to give access. So we need to create a real partnership between the two sides. That message can come from the top. Jeff Bezos tells his shareholders and by that channel also his entire team: "Amazon is the best place in the world to fail." How many CEOs say that? What you need is a place where people can explore.

We've often seen that roles like the chief internal ambassador tend not to be taken seriously within the company.

Alex Osterwalder

Alex Osterwalder is an entrepreneur and business theorist who ranks No 4 on the Thinkers50. Along with Yves Pigneur, he is the creator of the now famous 'Business Model Canvas', a tool for designing and mapping business models. He recently co-authored a book called The Invincible Company.

Then you chose the wrong person and you sent the wrong message. This is sometimes almost a joke when I hear CEOs say, "We're gonna bring in somebody young and fresh." Guess what? You just set yourself up for failure. The 55-year-old manager who's managing billions of dollars is not going to listen to the young graduate. This is [an] important [role], this is inventing the future.

You need to take some of your most credible people, who built brands, business units, they need to have a passion for innovation. If you choose somebody who was good at execution, you're also screwed. It's usually people towards the end of their career, nothing to prove, don't care about career advancement, just a pure passion for innovation. Not dogmatic. They're very, very good at tactics. And they have the credibility that everybody in the company is going to listen to them because they have nothing to prove. That's what you need for the role of chief internal ambassadors.

Portrait of Neelima Mahajan
Neelima Mahajan
Neelima Mahajan is Editor-in-Chief of Think:Act magazine. She has been a business journalist for nearly two decades in various publications in India and China, including a stint in the founding team of Forbes magazine in India. In 2010-11 she was a visiting scholar at University of California, Berkeley, where she was also a recipient of a Bill and Melinda Gates Foundation grant for an Africa reporting project. Neelima has a keen interest in management thought and has done extensive work in the domain. She has interviewed several world-renowned management thought leaders, Nobel Prize winners and global business leaders. In 2010, Neelima received the Polestar Award for Excellence in IT and Business Journalism, one of the highest awards in journalism in India.
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Munich Office, Central Europe