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InfoQ Homepage Interviews Talking Business Models with Alexander Osterwalder at the Innovation Games Summit

Talking Business Models with Alexander Osterwalder at the Innovation Games Summit


1. Hi, this is Todd Charron, Agile editor at InfoQ and I am joined today by Alexander Osterwalder. So, we are here at The Innovation Games Summit and you are giving one of the keynote speeches. So can you just first off, tell us a little bit about yourself.

My name is Alex Osterwalder, I co-created a book called Business Model Generation, which became a global best seller, 500,000 copies around the world right now, 26 languages and what is really fun is not just that it sold a lot but, who cares, but that people are using the tools in this book in particular the heart of the book which is the business model canvas. And the business model canvas helps companies develop better business models, and that’s something that I am passionate about, and I want to help people do that and we are building our own company at the same time. People ask me “what do you do, what is your job?”, I never knew what to answer because on the one hand I am a tool smith, a business tool smith, together with my team, Alan Smith, Yves Pigneur, all the people that are involved in this kind of stuff, and on the other hand I am an entrepreneur trying to build a software company that will push this whole thinking to another level. So those are some of the aspects of who I am, then there are many more, of course.


2. Just give us a brief overview of what is the business model canvas.

The business model canvas is very simply a visual tool that allows you to sketch out a business model visually. And why do so? So you can design better business models, so you can challenge the business models you were thinking of, to improve existing business models. The important part is it is a visual tool and what it does is, and I won’t go into the details of it, look up the business model canvas and you’ll find it, it’s hard to explain without the visuals, go have a look at it, but what is interesting is how it changes the game. So, in businesses people come together, could be a startup, could be a big company, start talking about the business model, the value proposition whatever, sit around the table and you talk a lot. Kind of becomes a blah-blah-blah meeting even though you have smart people, experienced people and Dan Roam actually calls this Blah-Blah-Blah. But as soon as you bring in a visual tool and you get people to collaborate around that, you have a strategic conversation, and in the case of the business model canvas you’ll have a strategic conversation around the business model. So, it allows you to more quickly, more clearly and in a better way, discuss business models. That’s what the business model canvas is about. If you are interested now, go look it up.


3. And so, you are here at the Innovation Games Summit, most people associate the business model canvas, really picked up among things like Lean startup community and haven’t really too much talk around it. So, what brings you to Innovation Games and why is that an actual fit?

Well, the business model canvas is a funny animal because it’s used in many different communities and I was pulled into the Lean Startup community a bit because I was focusing more on large companies and working with senior executives, so it’s really fun to see startup here, startup there, designers start using the business model canvas, people in biotech research, so all over the place. Now, why at this summit, why is this an interesting topic is because working with the canvas is a very playful activity and Dave Gray who wrote Gamestorming, co-created Gamestorming, he even calls it a game using the canvas. I don’t always go as far, in particular when I use games senior executives kind of shut off, I just call it a business tool. But it’s actually very close, I was fascinated by Luke’s work for a long time, so it was a natural fit and he is going to speak at our summit, The Business Design Summit, which is more about strategy and innovation, so all these fields are overlapping, this is all a natural fit, and all these things together is what brings us a step further. It’s not just one little piece here and the Lean Startup community here and the serious games community here and the strategy community, it’s actually the same thing, it’s just different angles or even different glasses on the same thing, but you need all of those to advance. So it’s not just one piece it’s all together.


4. Maybe tell us a little bit about your talk which had a little bit of workshop element to it. So, maybe just a bit of an overview on that and then I might ask you some specific questions.

In my talk I got people to work and usually, when I talk about business model innovation or coming up with new business models or here I call it strategy as play, I outline what it takes to come up with better business models. The first one is a shared language and I use the business model canvas to create a shared language, very powerful, if everybody uses the same tool and understands this and shares the same definition of business model and the same visual tool. Your number one; the second thing, number two, is one that is not practiced very often, even in the Lean Startup community I would say, is prototyping different alternative business models very quickly. Say “this is the product I want to launch, but what could be two, three, four, five different business models” and sketch them out very quickly and when I say different business models I mean a business model that creates recurring revenues, a business model that has no fixed costs is a second alternative, no fixed costs just variable cost. Maybe as a third alternative, a business model where you are working with your most serious competitor. So, very different alternatives for the same product, because at the end of the day what gets you to succeed is not just a successful product, great value proposition, that gives you market traction and that’s important, but it’s always the better business model, a better business model will always out compete, not better technology nor better product. So, you need to prototype different business models to figure out what could work. Now, if you just stop there, then you do what I call intellectual masturbation because you want to test those businesses, just because they’re great on paper doesn’t mean they’re going to work, you’re stuck in the business plan error if you do that. Number three in this process is going out and testing it. This is where customer development and Lean Startup principles are very powerful or serious games in this process, so that’s the third thing taking your ideas and going to test them very quickly. And the person who opened my eyes to testing business models is Steve Blank. We do a lot of work together in figuring out how can we do this in large companies, how can we do corporate entrepreneurship, and the one thing that is missing often is the testing part, people will come up with great stuff, but it won’t hold up to the market. So you need all three.


5. You mentioned very quickly going through the business model canvas; for some people a workshop, an hour, two hours, you have everybody going through things in eight and six minutes. So, maybe explain why is that important to shorten it to that time?

Well, it’s because of this idea of low fidelity and high fidelity in design. When you are at the beginning of something, when you are sketching out the idea, it doesn’t make sense to put a lot of detail, what you want is explore different alternatives, so you don’t need a lot of time. The problem today in most of the business thinking is “if I just think about it long enough and I work on the same idea and go into details, it will work”. But that is silly, what you really want to do is you want to explore alternatives, but in order to be able to do that, in my case with senior executives, you can’t do a day on this business model, a day on that one, a day on this one, people don’t have time, so you need to shorten it down and you can achieve. You can sketch out a business model, we did it today in two minutes, if you accept “that’s not what we are going to implement, we’re just exploring one idea here”, another two minutes second idea, another two minutes a third idea, that’s very powerful. And the reason I compressed it to two minutes is just to get the effect across. In a real world setting, I might give ten to fifteen minutes to sketch a business model at the early stage.

Todd: Luxury, luxury so much time.

Luxury, absolutely.


6. Can you give some examples of where you’ve used it, where they’ve had a real impact from it, without obviously some details?

Yes. So, I’ll just pick a couple of examples where I felt this is really strong, the message that came across. I’ll talk about a company that uses the canvas on some spaces and not in others which is 3M. 3M is known as a great company that innovates a lot, and that is true. But I had three people at my San Francisco workshop, we do workshops all around the world, and after the workshop they said “this is great, we are great product innovators, but we have no clue about business models”, at least for that team, in other parts they were using the business model canvas. But what was great to see is that they understood the difference between product innovation or value proposition innovation, if you want, and business model innovation. And to go on that same line, a product thinking and that you can go towards business model thinking, I’ll give another example. This is a Swedish company called SCA, they make hygiene products like tissues, to blow your nose, and toilet paper and other things.

So, I gave a keynote talk there and later I did some workshops, but what they realized after the keynote is “damn, we have some product innovations that actually failed, but we are going to dig them out again and start thinking of which business model could get those products to work” and I found that a very powerful message, because they understood product innovation is not enough, it’s about thinking further, thinking about business models. The third example and still staying in that space of product innovation, business model innovation is Ericsson, another Swedish company. I was just at Ericsson two weeks ago and I talked, I never worked with them in a consulting, or in a keynote assignment, I just watched how they are using the canvas, but I had some of their executives in a public workshop and at the end of the day I said “guys, close your eyes and ask yourself how much money you’re spending on R&D, research and development. Visualize the number.” In case of the Ericsson, huge figures, billions of euros put into technology innovation. I said “ok, now, look at a second thing, ask yourself how much energy and time and money do you put in thinking about the right business model”, their jaws dropped, because while they have a huge budget for product innovation, for something that is just as important, if not even more important, they don’t have the tools, the time, now they have the tools they are actually using the business model canvas systematically, but there is no budget for business model thinking, which is unbelievable because it’s product, technology and business model that’s success, it’s not either or it’s and. But we are just learning how to do more business model thinking. In fact together with Steve Blank, the father of customer development, we’re thinking about what does this mean in the context of corporate entrepreneurship, what would we have to build there so that people don’t just focus on R&D, but focus on building new companies inside of large companies. That’s damn hard to do. Long answer, but to a very interesting starting point.


7. So, we covered the business model canvas that covers the business model side of things and you have a new canvas now that covers the product side of things. Tell us about that.

I call that a plugin to the business model canvas, I strongly believe in this idea of methodological shopping that you need to weave together different methods, wherever they come from, to solve a problem. And we created the business model canvas for business models, but at one point you might want to sketch out in more detail your value proposition, so we came up with the value proposition canvas which is a plugin to the business model canvas but more visually, allows you to zoom in, you might have one post it note, one sticky, one statty, called value proposition, you write down what it is and you zoom in and you see the details of the value proposition. It’s like a canvas in a canvas, you don’t show them both at the same time, you zoom in, you have the big picture, the business model and then you zoom in to the value proposition and you get the details of that in relationship to the customer’s jobs, pains and gains. That’s very powerful. Why did we come up with this? It’s because we figured out that these visual tools work, they help you create strategic conversations. And another business model is one where we didn’t have strategic conversations because we didn’t have a shared language. Another space where we don’t have that is when it comes to products and value propositions, we build stuff but before building we might want to think about it in a structured way, so we came up with the value proposition canvas.


8. You’ve got the two out there and of course inevitably somebody in the audience asked you a question about something that was derived from this business model canvas, and that was the Lean Canvas, and I think I got you into a bit of trouble on Twitter and the in regards to your comments but maybe you can share with us some of your thoughts on the Lean canvas.

What I found interesting, we put the business model canvas under creative commons license so that people can adapt it and use it in their own situations and some people did adapt it, some in a better way, some in a worse way, but what was interesting with the Lean canvas is that there was some traction. Startup started to use it, so I was wondering what is it, is it better is it worse, why are people using it, and what I realized is if you look at the business model canvas, it focuses on the big picture but it doesn’t allow you to sketch out the details around your product, your value proposition and that Lean canvas looks at that a bit more, but I think it misses some pieces because how can you talk about product without connecting it to the jobs, pains and gains that the customers have? So we came up with an alternative that is very product focused, the value proposition canvas, instead of turning one into more product focused tool, we said “no, you need the business model canvas, but you also need a tool that allows you to sketch out the value proposition canvas”. And I think that’s where Ash Maurya has a huge merit is that he put the finger on the fact that “hey, it would be great that the startup community wants something more product focused”. The danger is that some people would say “value proposition canvas, that’s exactly what I needed to figure out what is the value proposition of my product”, but again what gets a business to succeed is a great value proposition embedded in a great business model, and great business models will always out compete better technology or better value propositions, because the better business model is the one thing that makes you successful. Financially sustainable and you can turn a ten million dollar company into a multi-billion dollar company, that’s the business model, it’s not just the product or the value proposition.


9. Now, sidetrack a little bit, you mentioned it was released under a creative commons license. What lead you to that decision?

I just found it cool at the beginning, this is when Creative Commons came up and I wanted people to use this, the business model canvas comes out of my Ph.D. which I wrote at the University of Lausanne, my Ph.D. supervisor was Yves Pigneur, who became my coauthor and I put it out there on my blog and I thought wouldn’t it be cool to get more people to use it, to adapt it, to change it if they want to, to put their name on it, so Creative Commons was the ideal tool to actually do that. And I do think that because we put a lot of stuff out there for free, for people to use, there’s no license fee to use the methodology, it took off because of that, that is one of the reasons because it works, but also because it’s not a proprietary methodology people can use it. People today embedd it in their software companies and are direct competitors, so we’re building a software around the business model canvas, others do it as well. Now, we are creating other tools and I think we have a certain advance on a couple of things, but it’s fun to see that this is taking off. So, Creative Commons is a great tool to get a lot of people to adopt your ideas.


10. Now, one other thing in the session, we talked a bit about a cautionary tale about Qualcomm, I was wondering if you can relate that again to us?

I was looking for great examples of failure talking about business model innovation and Qualcomm had something called FLO TV or MediaFLO and that was a huge failure and I always wondered how can very senior and experienced executives let this happen, the official number is 800 million dollars, that was awesome, that’s what I got out FT in the article where I read about this, now I know a little bit more and I know the back story a little bit. But the reason why this happens is that in most companies, and Qualcomm is definitely not alone, I see this all over the world, the best companies in the world, we don’t have the processes yet in place to experiment with new business models, and if you take the case of MediaFLO, well, they invested in a big idea without testing the business model first, because that’s how a lot of companies do it today and Rita McGrath, who is a great strategy thinker, she calls this wild-ass gambles.

So, large companies still make wild-ass gambles. But now we figured out the process and people are becoming more process oriented, they are using the business model canvas, they are using customer development, they are using Lean Startup principles to not have these huge failures. There are a couple of those out there and pick whatever company you want, they all have them. So, back to this small anecdote with Ericsson, I remember testing this customer development idea the first time and I said “if you don’t test your business models, you are burning a pile of cash”, and on my visual slides I had a pile of cash burning. This was the first time I ever pitched that idea, because I believed in it, but I haven’t done it in large companies. So, this senior executive of Ericsson stands up and says “Alex, this is not true”. I thought at the end of the day I had just ruined the whole day, my reputation is gone, and he said “that pile of cash on your screen there, burning, at Ericsson, that’s much bigger” because at large companies we still do these wild-ass gambles, so we don’t have the processes to experiment first small, fail, learn, iterate and then experiment with more money. When we do the big experiments we actually already know that they are going to succeed, because we learned so much along the way, it does, it’s not a wild-ass gamble anymore.


11. It sounds more like you are more focused on the larger organizations side than perhaps the startup side where Lean Startup has taken hold first. So how would you see larger organizations getting started with this and making sure they can make progress within an organization that probably has a lot of structure around that?

You know what, it’s actually the same process, and that’s why all this stuff gets just as much traction in the large companies as in the startup field, it’s the same processes, it’s entrepreneurship to build the new business model. Now, the disadvantage that large companies have is the existing structure, the advantage that a large company has is the resources and the knowledge that are in the company, but you need to structure it in a different way so you can succeed. So, if we take large companies, today it’s very hard in a large company to experiment, fail, learn and iterate. Why? Because today failure in a large company, most large companies, means career suicide. So nobody will officially admit “oh, I failed with this, but I learned and I went on”, this just doesn’t happen. What’s spectacular about Silicon Valley, to quote Steve Blank here, father of customer development, he says it’s one thing that in Silicon Valley you want to know, something that is very powerful, you know how you call failure in Silicon Valley? You call it experience. Nowhere else in the world do you call it experience, and Steve Blank maps this in a nice way, in a large company you probably don’t have a job again if you fail. In Silicon Valley they give you money again, if you don’t blame somebody else, if you say “this is what we learned, I am never going to do that again”. So, we need that kind of culture in large companies as well, but not the wild-ass gambles, where you put hundreds of millions of dollars in an idea, we actually do that in companies, but usually some kind of executive is going to fail and then move on because he just killed his carrier, no, what we need is a process to experiment, that’s what we need in large companies, what we don’t have today. And that’s the hard thing to set up, that context. The tools are the same, but you can’t use those tools if you don’t have quick decision making processes, if you’re allowed to fail, learn and iterate. If you have the right incentive system, you’re not remunerated, incentivized on making a plan, because a plan is not going to work because you don’t know how the business is going to look like, you are incentivized to learn quickly and to iterate until you build the right business. So, we have a lot to do there, in the space of corporate entrepreneurship.


12. It that where you are going now or what are the next steps for you?

Personally, I am focusing a lot on the startup that we are building, it’s called the Business Model Foundry, we have a couple of products out there and the one that we are focusing most on is Strategyzer,, which is this online collaboration platform to develop business models. That’s the starting point, we want to go beyond business models, but the value propositions, visions, strategy, all those things need tools that accompany the paper based process, the meetings that we have, we might do a workshop with paper, what do you do, take photos and we send them around, people go back to Singapore, to London, so on? That doesn’t work, we need software based tools that accompany the paper based workshops that we have. We need software based tools to play with the numbers, to do computer aided design, no architect today would not work with computer aided design, to figure out the strengths of the structures and so on, this is just normal, that’s part of the job. So, my team and I, my cofounders and I, this is what we really want to do, we want to bring computer aided design to business strategy, that’s our ambition, that’s what I am focusing on most. And besides that, I am just focusing on topics that I find passionate like corporate entrepreneurship, there I am working with Steve Blank, Henry Chesbrough, we’re thinking about what are the pieces there and how we put that together.

Todd: Alright. Well, thank you very much, Alex.

My pleasure.

Apr 10, 2013