Prioritization Road Map: Inventing the Future – with Alexander Osterwalder

June 29, 2020

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Alexander Osterwalder is the best-selling author of 5 books and the creator of the renowned Business Model Canvas. Along with Yves Pigneur, he’s the #4-ranked thinker on the Thinkers50 list of management thinkers in the world. In this podcast discussion on creating the invincible company, Alex shares a wealth of tangible insights for leaders on how to balance the need for improving the existing with inventing the future.

Listen to the Episode

Viewing the conversation with Alex through the lens of the Product Mindset, these are a few key takeaways you can use to guide your teams and narrow their focus:

Avoid the Temptation to Go It Alone

“Innovators like to call themselves pirates and rebels,” Alex says. “Historically, we kill pirates and rebels.” The lesson? Innovators must avoid the temptation to blaze their own trail. The more prudent and proven route involves solving for your customer’s needs – gaining a deep understanding of their wants and working within a broader team construct to achieve them.
Original ideas are never spot-on. Innovation requires flexibility, working with others, and listening to others much more than it does brainstorming brilliant new thoughts.
Innovation requires you to be nimble enough — and humble enough — to look at what you’re doing as product discovery instead of idea execution.

Always Be Inventing Your Future

There are 3 types of innovation: efficiency innovation, sustaining innovation, and transformative innovation. Efficiency and sustaining innovation are about improving existing products, services, or business models. Transformative innovation is about excelling at change – inventing the future and moving into entirely new spaces.
While each type of innovation is important and necessary in its own right, transformative innovation is the only kind that will keep your company alive a decade or more down the line.
You need to be ready to invent the future the minute you have a business model that’s working.

“There’s often this myth, ‘Oh, I just need to find the right idea.’ Ideas don’t matter. Ideas are free. They’re everywhere. You need to test your ideas an adapt them until they work.”

Experiment until it works, then invest.

Too often, innovation gets lumped together with technology. Innovation is about creating value for customers and your business as quickly as possible. In the Product Mindset, we call this minimizing time to value. Invention is related to technology, and it’s a small subset of innovation. You can use technology to innovate, but you don’t have to.
The preconceived notion that innovation has to be expensive from the start is simply false. “Entrepreneurship and innovation is about adapting the idea until it works, and the until is the most important word here,” Alex says. “A little bit of money to adapt the idea, then the more you learn, the more you start to invest…it’s metered spending.”

Resources:

About The Innovation Engine

Since 2014, 3Pillar has published The Innovation Engine, a podcast that sees a wide range of innovation experts come on to discuss topics that include technology, leadership, and company culture. You can download and subscribe to The Innovation Engine on Apple Podcasts. You can also tune in via the podcast’s home on Spotify to listen online, via Android or iOS, or on any device supporting a mobile browser.

Transcript

Intro: [00:00:01] We’re sitting down with the innovators, middle managers to CEOs, who are on the front lines of digital transformation to see how they did it and what they learned.

Intro: [00:00:09] That’s the important thing with change, right? It’s that whether you’re making change or adjusting to change, it’s really about focusing on the people.

Intro: [00:00:17] So, join us as we uncover gritty perspectives on turnaround jobs, prioritization, road mapping, user behavior insights, and scaling organizations.

Jessica Hall: [00:00:30] Our guest today is Alexander Osterwalder. You may know him if you’ve heard of the Business Model Canvas or Value Proposition Design. Today, we’re going to talk about his new book, The Invincible Company.

Scott Varho: [00:00:42] You’ll hear a practical approach to how to invent the future by trusting the process.

Jessica Hall: [00:00:46] And we get into the utility of failure. So let’s dive in. So, our guest today is Alexander Osterwalder. He’s the author of many books and ones I’m sure you’ve seen around Business Model Generation, Value Proposition Design. And we’re here to talk to him about our theme of looking at your business and your portfolio of products, which is really convenient because he has a new book coming out about The Invincible Company. And so, we’re really happy to have you today.

Alexander Osterwalder: [00:01:22] Pleasure to be here. Thanks for having me.

Jessica Hall: [00:01:24] The theme we’re on at the moment is around understanding your business or your portfolio of products and trying to make decisions about, where do you invest, where do you hold back, and how to think about that more collectively because we see a lot of people who are struggling to try and figure out those investments. So, how do you approach that?

Alexander Osterwalder: [00:01:47] Well, first, I think it’s very simple to divide a company in the world and a company into two worlds, actually. One, managing the existing, and the other one, inventing the future. And companies tend to focus entirely on managing the existing. You can innovate, but it’s maybe more efficiency innovation, right? Improving your products, improving your business model. And that’s fine. That’s okay. That’s efficiency innovation. But it’s usually not enough to stay alive for five, 10, 50, 100 years.

Alexander Osterwalder: [00:02:17] So, you need to go beyond efficiency innovation. That is sustaining innovation. If you make cars, your new car model is not going to give you growth for the next decade. It’s just going to replace the older cars that you’re not selling anymore. So, that’s good. But you probably also want to think of transformative innovation because maybe your industry is transforming, changing, dying, right? So, if you do efficiency innovation and that’s it, you’re probably going to die more efficiently with your dying business model.

Alexander Osterwalder: [00:02:45] So you want to start investing in the future, but while you’re successful. It’s not that one of these three types of innovation is right, the others are wrong. No, it’s all of these. Efficiency innovation, sustaining innovation, and transformative innovation. I blatantly steal that approach, these three types of innovation, from Clay Christensen and others, but I think it’s important because people say, “Oh, everybody needs to be an innovator,” or “Innovation is going to save us.” Well, depends what you do.

Alexander Osterwalder: [00:03:11] Again, if you just do efficiency innovation, it’s not wrong, but you might just more efficiently die, right? So, you need a portfolio, actually. Probably two portfolios. That’s the way we frame it. Portfolio of improvements and innovations with what you have, your existing products, services, business models, and a portfolio to invent the future. And now, depending on how at risk your business, your industry is, the more you need to invest in the future.

Alexander Osterwalder: [00:03:42] If you have a really powerful business model, take Apple and Amazon, they have built business models that are practically — it’s impossible to disrupt them, at least in the next 10 years. It’s going to take 10, 20 years. Even if it stops innovating right now, it’s going to take a long time for anybody to disrupt them because they’ve built so powerful business models. So, how much you innovate, where you innovate is very context specific. But what you want to know is there is a world of improving the existing and there is a world of inventing the future. Those are different worlds and you need to approach them differently.

Scott Varho: [00:04:21] The intersection of those is where I think the really interesting and vexing part of this is. So, how do you think about those two things? Because to borrow a Clayton Christensen term, if you’re disrupting yourself, do you maintain those, you talked about two portfolios? Are they an arm’s length relationship? Are you trying to do both in the same pool of resources? How do you look at that?

Alexander Osterwalder: [00:04:43] It’s usually difficult. That then has to do with size as well, right? If you’re a startup and you’re just trying to figure out what’s your right business model, you don’t do anything else than search for the value propositions and business model just to get started. If you’re a medium-sized company, well, you’re going to start trying to improve to scale, so you’re looking at innovations that will help you grow and scale, but you also have to start to build that other engine.

Alexander Osterwalder: [00:05:12] And usually, it’s not the same people. Otherwise, it’s very schizophrenic, that the smaller you are, the more likely it’s the same people. But the challenge is that you need to have different people doing this. So, the way I like to frame it is, in the Bay Area and Silicon Valley, there a lot of things that are maybe not so good at the moment, but something is really powerful, and my friend Steve Blank likes to say that there’s one thing we call failed entrepreneurs in Silicon Valley. Experienced, right, because you get better at it.

Alexander Osterwalder: [00:05:46] So, there’s this myth of the young innovator and entrepreneur on the cover of the magazine. The reality is, actually, if you look at the research, the most successful innovators and entrepreneurs are over 40. So, it’s good for the older ones who are listening here, and for myself, but besides the joke, it has to do with experience. So, it’s very rare that first time innovators or entrepreneurs are successful. I mean, you have those people and they make it on the cover of the magazine, but that’s one out of the million.

Alexander Osterwalder: [00:06:16] But the reality is most innovators and entrepreneurs, they’re part of a team first. They watched how others fail. They learned a ton from other people’s failures, from other companies’ failures until they get it right. So, you need to have that type of person in your company who’s done it before. What you also need, and that’s maybe going from zero to whatever, one million, five million, 10 million in revenues, then you also need those people who are good to go from 10 million to more.

Alexander Osterwalder: [00:06:44] That’s scaling. That’s a completely different ballgame. It’s a different skill set. It’s rarely the same people. Is there a person who can do the full range? Yeah, that can exist. Again, one in a million. So, we need to have different skill sets for the different jobs in a company. And what’s really important is the bigger you get, the more managers you will have. And that’s not a value judgment. Managing the existing is different from inventing the future. So, what you actually need in a company is managers who manage the existing and are world class at that, and innovators, entrepreneurs who invent the future.

Alexander Osterwalder: [00:07:24] And they need to live in harmony, because today, this is my biggest enemy, is innovators like to call themselves pirates and rebels. Like that is pure stupidity. Historically, we kill pirates and rebels. Okay. So, I don’t really like that. It’s, “I’m a pirate.” Well okay. Everyone’s going to hunt you down and try to kill you. So, my colleague, Tendayi Viki, wrote a book, Pirates in the Navy, because he said, “Well, you actually want to maybe act like a pirate, but you want to be protected by the Navy.” So, I just think it’s important that we have this partnership.

Scott Varho: [00:08:00] And I’m curious, like how do you know the—I just keep pushing into this because I think this is fascinating. This dual-track innovation within a single organization is fascinating as a concept. But I mean, you talked about size as a delimiter, but is there something else about the maturity of your existing innovation, your existing market position or product or organization that tells you, you’re ready to splash out? Because we’re talking about a sizable additional investment track, where you’re siphoning off resources from your somewhat successful, hopefully, business, and then funding this alternative track, inventing the future, as you called it. What are some of the tells that leaders see that say they’re ready for track two?

Alexander Osterwalder: [00:08:49] So, I think you need to be ready for track two the moment you have a business model that is working. It’s not a question of size, actually. It’s a question of, how likely is your business model to be disrupted? So, small companies can be disrupted the moment they found a business model, somebody else might come up with the same technology, a bigger player might come in. So, it’s not a question of size. It’s all the time. So, innovation is not a stunt. It’s a continuous activity. And that’s the challenge.

Alexander Osterwalder: [00:09:17] So, I think you just need to be aware, how likely are you to get disrupted? The likelier you are to get disrupted, well, the more you need to invest in this track two. And talking about cost of innovation, I think there’s this myth that innovation is expensive. And I know exactly where it comes from. We say innovation, people think technology. Technology is hard, requires people, et cetera. That’s not the same thing. Innovation is creating value for customers and your business. Invention, that has to do with technology. And it’s a small subset, right?

Alexander Osterwalder: [00:09:51] So, you can use technology to innovate, but you don’t have to. Let me give you a wonderful example because one of my favorite examples is a company that disrupted an entire multi-billion-dollar industry with inferior technology. You know what I’m talking about? Nintendo Wii. When Nintendo launched the Nintendo Wii, the platform was off-the-shelf technology, terrible graphics, terrible speed, but they had a different business model.

Alexander Osterwalder: [00:10:18] If you ever played with a Nintendo Wii, like it’s fun, but the graphics are a disaster, right? But they were targeting casual gamers who didn’t care about graphics while the whole industry was focusing on hardcore gamers who want the best hardware. So, that’s a larger market. Casual gamers. My grandmother, my parents, my mother-in-law, everybody, my kids. The kids maybe go more in the hardcore gamer field, who knows? So, that is one aspect.

Alexander Osterwalder: [00:10:50] And the other aspect is that because it was so much cheaper to build these things, they could earn money from selling the hardware while everybody else was selling hardware at a loss. So, think of it, right? Inferior technology, bigger market, more profits. Nobody thinks of innovation that way. So, I think we’re a little bit—there are these myths in innovation that are just simply wrong. So, that’s the technology part. The other part is innovation does get expensive when you scale.

Alexander Osterwalder: [00:11:20] But when you start, it doesn’t. Let me give you an example that shows you that if you have too much money, you’re likely to fail. You increase the chances of failure with the amount of money you get. What’s a beautiful example now? Quibi, right? They’ve got 1.7 billion dollars, what happens when you have 1.7 billion dollars? You build something stupid that doesn’t work, that nobody wants. That’s exactly what happens. So, the people behind it were not stupid. These are experienced people.

Alexander Osterwalder: [00:11:58] Experienced CEO, Meg Whitman. An experienced Hollywood person, Jeffrey Katzenberg. But they got too much money, so they built something nobody wants. Entrepreneurship is not about the idea and executing it. Entrepreneurship and innovation are about adapting your idea until it works. And the until is the most important word here. It’s not about the idea. People overestimate the idea. So, you need to spend a little bit of money to adapt the idea.

Alexander Osterwalder: [00:12:27] The more you learn, the more you start to invest. It’s metered funding, right? So, actually, it only gets expensive when you have enough evidence that now’s the time to scale. And it’s interesting that companies that follow that approach, you know, lean startup approach started by Steve Blank with customer development, and then made popular by Eric Ries. That is what we’re increasingly seeing.

Alexander Osterwalder: [00:12:52] Too much money increases the risk of building something nobody wants. And I don’t just mean building in terms of products, building companies. WeWork, that business model never worked, at least not at that valuation. Why did it happen? Too much money. So, people always think you need money to succeed. Money is actually the enemy of good innovation at the beginning. When you scale, you need it. That’s a different story.

Scott Varho: [00:13:18] You need the market discipline, that scarcity of resources brings, right?

Alexander Osterwalder: [00:13:23] And it’s also, so there’s this myth that you can pivot yourself to success. Actually, great entrepreneurs also know when to quit their ideas that need to get killed. That’s why there is a venture capital industry and they manage portfolios. No venture capitalists believe they can be—there’s a lot of great people, you’ll notice that there are also some that are a little bit arrogant—but even they do not believe they can pick the winners.

Alexander Osterwalder: [00:13:51] Because they know you can’t predict the future, so they invest in a portfolio of businesses and you’ll have one or two out of the portfolio that will win and they will have eight that are losers in quotes, right? Because remember, in Silicon Valley, and the Bay Area, and the startup world in general, people have who have failed once, they’ve learned a lot. Next time, they’re not going to make the same mistakes. So, great investors actually invest often in people who failed and technically wasted venture capital money because they know those people are not going to make the same mistakes.

Alexander Osterwalder: [00:14:25] Now, there’s also sometimes stupidity involved. But most entrepreneurs, they fail because they were too early, because whatever reason. So, that’s this approach that we know we can’t pick the winner in innovation, so we need to constantly adapt based on the evidence that we get in the field. That’s the key thing, because there’s often this myth, “Oh, I just need to find the right idea.” Ideas don’t matter. Ideas are free. They’re everywhere. You need to test your ideas and adapt them until they work.

Jessica Hall: [00:14:55] I’m curious because I saw you talk about this idea in one of your early talks about it about three years ago. What set you on this path? What were you seeing or hearing in the marketplace that told you that this was a big problem, and that really needed some framework and a way of solving it? What was it? What were those markers or who are the companies that you were really thinking about when you set out to solve this problem?

Alexander Osterwalder: [00:15:23] So, at the very beginning, when Yves Pigneur, my co-author and myself started working on business models, he was my PhD supervisor, I was his PhD student. For the funny story, I actually did a job interview with him after miserably failing with a job interview with McKinsey. So, they didn’t want me. So, I was lucky enough. So, look at the example of failure. I failed miserably in my job interview with McKinsey, which put me off on the path that gave me the future I have now.

Alexander Osterwalder: [00:15:55] So, I was pretty lucky to fail. But with Yves, actually, his idea at the beginning was that he’s a business school professor, worked a lot with students from the technology school, which is beside us, the Ecole Polytechnique de Lausanne, he saw them writing business plans, but not really being able to articulate the business model. So, what he was looking for is a PhD student who could help figure out, systematically, what is a business model and could we kind of make software that would allow us to sketch out business models?

Alexander Osterwalder: [00:16:29] So now, 20 years later, that’s what we’re doing with Strategyzer. But that was the start, how can we rapidly sketch out business models? Then funny enough, when we launched the book, Business Model Generation, I went to the Bay Area and I got to meet Steve Blank, who read my PhD at the time and he was trying to convince his teaching assistant, Ann Miura-Ko, at the time to read the book, to read the PhD. And she said, “No, no, no, you got to read this book, Business Model Generation.”

Alexander Osterwalder: [00:17:01] Actually, they were talking about the same thing. The scientific thing on the one hand and she was talking about the business book on the other hand. So then, I got to meet Steve. And we merged the ideas, right? Because he really pushed this idea that you can’t figure out the business model from day one. You actually need to test, right? So, with customer development, he created this movement around systematically testing your business idea.

Alexander Osterwalder: [00:17:27] And so, we put those two things together and Steve Blank’s now a great friend, we always share ideas, new stuff comes out, that was the beginning. But essentially, I started working with established companies and I didn’t see them innovate on a large scale. We realized, well, it’s not enough to have one tool and one process, there are probably more tools that we need to work on. So, we wrote another book now, the fourth book, The Invincible Company, because we see that companies are not doing it yet.

Alexander Osterwalder: [00:17:57] Because when you write a book, the first thing you should always ask, “Does the world need another business book?” And the answer should be no, unless you arrogantly find an argument, why does the world want another business book? There are a million. Literally, there’s over a million business books out there in English. But we thought, well, people wrote about innovation that’s ambidextrous, and how do you do this in large companies, but it remained relatively abstract or theoretical.

Alexander Osterwalder: [00:18:23] Great ideas, great concepts, but we said we can do better to bring it into companies to help leadership teams actually scale this. Not just do it, but scale it. Because we saw teams doing the right work, but we didn’t see leaders creating the conditions for the teams to succeed. So, we wrote this new book, a fourth one, to help leaders and teams better work in collaboration, in harmony. So, that was kind of the motivation. And every time we see something doesn’t work, we don’t blame the people, we say, “What are we not doing right yet? What can we give them to help them?”

Alexander Osterwalder: [00:18:59] So, we always look at the mistake as, “What are we not doing right to help them?” And I think that’s what business thinkers should do more, they should look at what they’re offering to the market as a product, right? What’s not working in the product? No, don’t blame the people who don’t want to buy your product. They’re not getting it. They don’t know how to use it. Well, it’s too complicated, right? So, I think business thinkers need to do the same thing that we do in product design.

Scott Varho: [00:19:25] And Jess actually is co-author of the book, The Product Mindset, that our CEO and Jess put out, and it maps very well to a lot of the things that you’re talking about. But even better is the feedback that we’ll often get on the Product Mindset when people hear it is, “Gosh, my boss needs to hear this or my CEO needs to hear this,” right? “That would be really valuable. That would create the space for me to be nimble enough to do product discovery rather than idea execution,” which sounds like what you’re describing, which is, doing that at scale is scary for leaders. Means we don’t have a plan. We have an approach.

Alexander Osterwalder: [00:19:58] And I like that idea of the Product Mindset, even for organizational design, right? So, the company you’re managing is a product for your staff, for your team, and that ultimately creates value for customers, right? So, I believe the best organizations in the world, they create value for customers, because otherwise, you’re dead. They create value for your company. Otherwise, you’re dead because you’re going to go bankrupt. But they also create value for the team, because otherwise, people are going to leave. You’re also dead. And then, the fourth one, I’d say, is they create value for society.

Alexander Osterwalder: [00:20:30] So, if you take Patagonia, if you take Unilever, they don’t stop at creating value for customers, the company and the team. They say, “No, we have an obligation.” And it’s not just, oh, because we’re touchy, feely, because they understand that companies that create value for society and for the planet, it can actually increase the profits.

Alexander Osterwalder: [00:20:51] It’s not at the expense of profits. It’s in harmony. And that’s the key thing. We need to find new business models that satisfy all four of these areas to create value because if we continue just to innovate, to make more money, it’s not going to last for very long, or at least, our kids, our grandkids are not going to have a fun place to live anymore. So, I do believe it’s getting urgent to actually really ask how can we use companies as a force for good? And of course, Marc Benioff is pushing that, has talked about that a lot. Paul Polman, the former CEO of Unilever, is talking about that a lot.

Alexander Osterwalder: [00:21:31] So, I think we need to think beyond, “Oh, we’re creating great products because we’re cool people.” No. At the end of the day, we need to create great products and great companies for the benefit of society and the world because I do think we can do that as a force for good, because we can create better workplaces. You have better workplaces, people are happier. They can be happier at home, we get a better society. So, it’s not rocket science and it’s not about the touchy, feely. It’s really about just simple basics of how do you make things work for everybody.

Jessica Hall: [00:22:05] So, I think it’s interesting you say that because I’ve always felt like one thing I left out of the book was this last piece, and that you’re so thinking about the customer and the business, the customer, the business, and then you wake up and realize, oh, my gosh, we’re making something that is increasing teen depression or that we were thinking about what we could do, but we weren’t necessarily thinking about privacy and we weren’t thinking about the effects that we have on people.

Jessica Hall: [00:22:35] And all of a sudden, now, there’s kind of this reckoning when you see all that you create because there’s like that piece of your mindset that isn’t necessarily, it’s thinking about your broader impact, and what do you want that to be? So, it’s not part of your mindset. It’s not part of that goal that you’re trying to achieve. And I think as a whole industry, if we can call it the whole technology industry, has to now reckon with, what have we done? And how do we now start to rethink, and retrain, and re-evaluate, and direct what we’re doing for society at large? I think there’s a huge reckoning to be held there.

Alexander Osterwalder: [00:23:16] Yeah. And I think that the important part there is it’s too easy to blame—so, I watched this video from, Barack Obama was talking at a school and he was saying, “It’s super easy to just blame others, and call them out, and then lean back, and think, I’m doing good, I just said, those companies are terrible, or this, or that.” At the end of the day, you need to actually do something, right? Calling out people is not activism. It’s not going to help create a better world. It’s actually going to make it worse.

Alexander Osterwalder: [00:23:46] And that’s where we are today. Everybody’s fighting and nobody’s doing shit. So, what we really need to actually do is vote with our feet. If we believe, whatever, Facebook is not doing good, if we believe Apple is not doing good, if we believe our companies are not doing good, we need to vote with our feet, right? So, that’s the only way. So, there is a personal responsibility part there that as individuals, we need to own what we’re creating in the world.

Alexander Osterwalder: [00:24:16] Too many people take the easy path, it’s enough to blame. And they feel good about themselves. That’s not enough. The world is not going to change because you blame them, and then you feel good about yourself. It’s all about action. So, I think there, as I’m an entrepreneur, I have a team, employees, I can create a better workplace which will have an impact on the world. So, I need to start there. I need to start on that small thing, and then I can educate other entrepreneurs. I can educate CEOs.

Alexander Osterwalder: [00:24:46] So, it’s really about the actions we take that will make a real difference. And that is all about responsibility and accountability. And when you’re a parent, try to help your kids actually act like that. So, there’s a lot more influence that we have as individuals than we actually believe. We blame others. We blame institutions, big corporations. That’s not enough. Don’t feel good about yourself because you called out an institution. That’s not going to work. That’s not going to change the world.

Scott Varho: [00:25:16] One of the things that strikes me as you’re talking is that, because a lot of times, I’ll explain to engineers, why do we care about money? We care about money because, well, yes, of course, we need salaries. Everyone starts there. But the next thing is, it’s like, why do we care that our product sells? Because we’re trying to create a product that other people find valuable. If you’re the right kind of engineer, the kind that we want to work with because we build products, then that’s the thing you care about.

Scott Varho: [00:25:39] You want to build a product that people use, and find delight in, and feels that solves a problem for them, right? And so, the money is a proxy for value, but it’s a proxy. And if you lose sight of that, it becomes about the money, instead of realizing that it’s about value, to your point. And I think that once you return to the value conversation, now, you can talk about this more expansive idea, like what is value, what is valuable to us? And when I talk about us, I’m talking about an expansive version of us. That’s a pretty neat concept.

Alexander Osterwalder: [00:26:07] And I think that’s important when we talk innovation, we need to ask why, right? Like innovating to innovate, yes, of course, we get passionate about technology, we have fun, but we have to get back to the why every now and then, because otherwise, we get carried away with, as you said, just with things that after, all of a sudden, we realize, oh, we created a monster, a Frankenstein. So, you got to go back to the why and ask yourself.

Alexander Osterwalder: [00:26:30] So, take my example. I help large companies, leadership teams innovate and create more growth. Okay. Is that exciting to help a global corporation and multinational earn more money and grow? Well, it depends on how you look at it, because if I can help companies reinvent themselves, I can create more job stability. If I can help them create better workplaces, I actually have a really big impact on how people feel. If I can help a leadership team that manages 400,000 people create a better workplace, wow, that’s an impact, right?

Alexander Osterwalder: [00:27:07] So, we always kind of glorify the startups, and I love the startup world, but we kind of just say, big companies are bad. No, they can be a force for good because there’s so much leverage. So, I like to help companies innovate so they can actually stay alive because if a large company fires 10,000, 50,000, 100,000 people, wow, that is a lot of suffering. Who pays the bill? Well, guess what? The government, ultimately, our taxes.

Alexander Osterwalder: [00:27:38] So, helping companies innovate is not just to help them make more money. It’s actually to help them create a better workplace, better jobs, job stability, what we’re kind of losing. So, it’s always easy — sometimes people say, “Yeah, but it’s natural that large companies die and startups overtake them.” Well, that’s easy when you’re not the person who’s being fired, right? So, some of these arguments, yeah, okay, that’s an entitled argument.

Alexander Osterwalder: [00:28:05] So, I think we need to look at the real costs of those things, then innovation gets really exciting again, because then, it’s not just about money. And again, I believe in certain forms of capitalism because money is a way to measure how much value you create. And guess what, if a company doesn’t make money, it’s going to die and you’re going to have job losses. So, money is not a bad thing, but it shouldn’t be the goal. Absolutely not. So, I completely agree with what you said, Scott.

Jessica Hall: [00:28:32] I’m working with a company right now, and I think what’s really unique and special about the work they do is they have kind of come through. They have their initial business model. They’ve done really well. They had a unique model in their space. And now, they’re trying to get to the next one. And as you look and you go into this company, you’re like, they have big dreams and ideals, and they’re trying to make this pivot, and they’re struggling their way through it because they don’t know how to do what you’re talking about, which is okay, we have this one, but we know there’s this other thing. And to the point where the CEO grabbed three coders and went into a room for a couple months to do it, which is like, that doesn’t feel like the right set of things.

Jessica Hall: [00:29:15] And so, this particular organization, I think if I can figure out how to help them, they’re a 200-person company, that we can create a lot more opportunity for these like middle managers to do something really special, but how do I help this organization figure out how to, yes, this is your current business model and this is how you start to figure out that you know that next product is there in order to get the next evolution of your company? So, how do they structure the organization? Because I think the only way they made progress was to have the CEO grab a bunch of people, break all the rules, do everything completely differently, and go over there. And now, they’re trying to reintegrate and they’re stuck.

Alexander Osterwalder: [00:29:58] And then, that’s the problem, right? So, as long as we break the rules to try to innovate, we’re in a bad place, right? So, we know how it works now, so the rules should actually be that we create the right system to systematically innovate because we now know. I mean, most of it is known, not all of it. And we can’t guarantee the size of innovations, but you know what? We can actually decrease the likelihood of blowing up, wasting money by a lot.

Alexander Osterwalder: [00:30:27] So, today, I like to say, give me a million, I’ll give you 10 million back because we know how to manage a portfolio to do that if the mindset is right. So, you need to actually put in place a system with the right rules, the right culture, the right skills. And you know what? The magic will happen. Trust the process. The problem is there’s still this heroic approach. The pirates, if I’m just a pirate and a rebel, and I break the rules, we’re going to get there, we’re going to pivot ourselves to success. We know this lean startup thing.

Alexander Osterwalder: [00:30:58] Well, you know what worked five years ago or 10 years ago doesn’t work anymore. We learned a lot more. So, today, this is closer to a profession than it used to be. And the way I like to frame it is the medical profession. I love how doctors are trained, or surgeons. Imagine if you’re a surgeon and you have to go through heart surgery, you’re in the operating theatre, your surgeon shows up with a Swiss Army knife, don’t get me wrong, I love Swiss Army knives, but maybe not—shows up with a Swiss Army knife, and then he or she says, “Oh, right. I learned this thing at a workshop I did over the weekend for two days, I’m going to try it out.”

Alexander Osterwalder: [00:31:36] You’re going to run, right? If you’re not just already tied in. So, I think in innovation, we still kind of act as if this was not a profession, didn’t know how to do it. So, the 20% rule. Oh, I’ll give you 20%, figure it out. Guess what? If you do that with marketing or finance, you’re going to have a lot of problems. So, in innovation, we know enough now to really make it a serious function. And it’s not the young university grad who’s going to be the best innovator.

Alexander Osterwalder: [00:32:07] It’s the people who’ve done it five, 10 times who will be the best innovators, not because they can pick the idea, but because they know how the process works, they know how the tools work. So, I think that’s where we need to stop seeing this as breaking the rules. Some companies, they give team members prizes to break the rules. Like that’s insanity. Why don’t you change the rules rather than giving people a prize to break the rules? Like, really?

Alexander Osterwalder: [00:32:36] So, something is still wrong in innovation in many companies, but the good news is it’s changing, right? So, a lot more companies, thanks to all the work we’re all doing trying to figure this out, the business thinkers, authors, consultants, and advisers, and internal people, it’s changing dramatically and we’re seeing companies getting better at this. I’m impatient. So, for me, it’s too slow, but I’m already happy that companies are going into the right direction.

Scott Varho: [00:33:04] Yeah. You reminded me, there is a company, and I’m going to screw this up because I don’t remember the name of the company, they operate out of Cambridge, Massachusetts. And their entire model is basically these stage gates for experimentation, right? And so, you’re given a certain allocation of resources and you iterate. And if it’s able to meet the metrics of getting out of that stage, then there’s additional resources made available to that idea. I mean, it’s almost as it’s inculcated to your point into the culture. The entire machinery is not to pick winners, but to build an experimentation and validation engine. And really, quite impressive. And as you’re talking, I was thinking about that.

Alexander Osterwalder: [00:33:46] And the problem to a certain extent is that we use the execution mindset for innovation, so we think it’s about planning and going forward, marching forward. You’ve reached that stage, reach the next stage. Well, guess what? In innovation, you might reach a stage where the customers said they loved it, but they say, “Well, I’m going to pay five bucks for that,” and you’ll need 20 to make it work financially. Guess what? You just failed.

Alexander Osterwalder: [00:34:10] So, you have to go back maybe three stages, where the stage gate process really doesn’t work is it comes from execution. There are many steps back. And that’s okay in innovation. In innovation, you actually don’t want people to walk forward blindly. I ask a question, which sounds stupid, right? But I always ask it at the events I do, 300 people, 3,000 people, I ask them, how many people in the room are, today, working on a product or service that nobody wants? And there are always hands that go up. The honest people put their hands up. Now, are these people stupid? Because why don’t they stop? Well, they’re not stupid.

Alexander Osterwalder: [00:34:51] The processes in the companies are broken, so they get forced to execute something, where they already know, this is not going to work, right? So, it sounds ridiculous, but this is what’s happening in the world. Projects get funding based on a plan when the team already knows, we talk to customers, they really don’t care about this thing, but it’s the pet project of somebody in the company with a nice business card. So, I don’t want to kind of sound very negative about this, but the good news, again, is that this is changing. The leaders are getting smarter about innovation. And I don’t want to blame leaders. I have one CEO friend, I asked him, “Well,” on stage during an interview I asked him, “You understand innovation, why did you not do more of that at your multi-billion-dollar company?”

Alexander Osterwalder: [00:35:38]He said, “Alex, it was very clear. For mergers and acquisitions, I had a checklist. I just had to call the lawyers, and it was executed, and the stock market understands it. I didn’t even need to get it right every time because they just know how this works. Sometimes, you win. Sometimes, you fail. But innovation, my, I’m not going to touch that thing, that’s a black box,” right? So, leaders today, they will not go into that direction because it still is a black box. And now, folks like us, we’re trying to educate. And I think it’s changing. So, that’s the great news. So, great also with the podcast.

Scott Varho: [00:36:12] Alex, let me push in on that a little bit, because if you’re not funding the plan, because that’s the way they teach it, right? You have a business plan, and then you fund the execution of said plan, right? That’s how this works. If it’s not that, if that’s wrong, then what are they funding? What are they funding? How would you describe the thing that they’re funding?

Alexander Osterwalder: [00:36:33] So, this is what I would usually draw. Now, let me try to draw that visual with words. Not that easy, right? You fund the portfolio. So, basically, I’ll give you an example, like a real-world example, makes it concrete. Bosch is a German technology company, 400,000 people. They, over the last three years under Uwe Kirschner, they invested in 200 teams over three years, but they gave them 120,000 euro, maybe $140,000, and they gave them three months. Okay.

Alexander Osterwalder: [00:37:06] So, you invest in that over three years. But here’s what happens, after three months, the teams need to show the evidence that they generated, talk to customers that generate evidence. Guess how many projects are killed or don’t get follow-up funding? 70%. Okay. So, 70% of all projects don’t get follow-up funding. And the teams don’t see this as a failure. They understand, we didn’t bring the evidence to the table. It’s okay.

Alexander Osterwalder: [00:37:32] Nobody gets fired because it’s okay. 30% of the teams get 300,000 euro, so maybe, I don’t know, $360,000, something like that, and they get maybe six months, maybe a little bit more. So, the time frame is a little bit more flexible there. Again, after that phase, they have to come back with evidence. Now, maybe it’s willingness to pay evidence, maybe feasibility evidence. Guess how many projects get killed after this stage? 75%. Okay.

Alexander Osterwalder: [00:38:01] So, from the 200 projects, only 15 make it to execution. And it’s seen as a success because they know that you’re funding the portfolio and you’re looking at the return on portfolio. You’re not looking at the return on project. Now, here’s when we’re taught efficiency innovation. It’s a little bit different. When I’m making an app for the sales force, I better get it right. So, that is efficiency innovation. There is a lot less uncertainty.

Alexander Osterwalder: [00:38:30] So, there, you will still test, but the likelihood that one project is going to get it right is very high. But when you’re talking new customer segments, new channels, new supply chain, the likelihood one team is going to get it right. The one thing you funded is practically zero. Statistics from early venture capital and I think, Jess, that’s the presentation you saw, it’s the first time I tried to figure out the numbers.

Jessica Hall: [00:38:56] Yeah.

Alexander Osterwalder: [00:38:56] One out of 250 projects is an outlier and a mega success. One out of 250. So, statistically, as an established company, if you want a really big success, hundreds of millions of dollars, you’d have to invest in 250 projects, small amounts of money to create one winner. Okay. So, you can’t pick the winner. And now, look at the companies that are really good at innovation. Let’s take one. Amazon, the usual suspect. Why are they good at innovation?

Alexander Osterwalder: [00:39:29] Because the CEO says, “We’re the best place in the world to fail.” How does that resonate with what I just said? 250 projects that fail to create one big winner. That’s exactly what Amazon designed into its culture. Another company that’s not a usual suspect is Ping An. It’s my favorite example in our book. Ping An, 10 years ago, was a boring finance, a banking, and insurance conglomerate in China. The founder, Peter Ma, said, “We’re going to get killed by technology companies. We better change. We’re going to become a technology player investing in arenas.”

Alexander Osterwalder: [00:40:05] He created a division under a co-CEO, Jessica Tan, who would follow exactly the approach that I explained with Bosch, they would give money to the team and say, “You’re not going to get it right. You’re going to fail. But go ahead, and try, and adapt until you get it right.” Today, Ping An has various successes. They run the biggest health platform on the planet called, Ping An Good Doctor. Okay. Think, it’s an insurance and banking company that created the biggest health platform on the planet.

Alexander Osterwalder: [00:40:39] Why? Because they decided, strategically, they need to invest in certain arenas and that they would need to adapt until they find the right idea. So, it’s not about investing in the business plan, it’s about strategically investing in innovation, in a portfolio, swallowing all of the failures because you know exactly how that is going to create a winner. So, we’re not talking big failures, we’re talking a lot of small failures. But even bigger over time, you increase the capital.

Alexander Osterwalder: [00:41:08] So, Jeff Bezos likes to say, “With the growing size of Amazon, we actually need to increase the size of our failures.” How many CEOs do you hear say that? “We need to increase the size of our failures.” Wow. Okay. But it’s not insane. It’s systematic. That is a process — portfolio theory. We’ve known that for a long time, so we just need to start doing it. It’s just a question of choice. It’s not that hard. It’s a question of really putting in the energy, the money, and the strategic intent. And any company can do it.

Scott Varho: [00:41:46] Sometimes, I like to say, Silicon Valley is a little bit obsessed with failure only because I don’t think it’s failure that we want. More failure is not good, but learning is. And the insights that you gain from failure, if you harvest it, I mean, if we just make it about failure, we’ll get a lot of failure. What we really want is learning. It’s that learning that’s so high value.

Alexander Osterwalder: [00:42:06] So, no. I will push back on that, and I’ll tell you why. So, we don’t want learning either. What we want is to build a business. And the reason I actually emphasize failure because, of course, we don’t want failure, but we don’t want learning either. What we really want is to build a business. But here’s the thing, if you don’t embrace failure, if you don’t make it a legitimate thing that will happen, not it can happen, it will happen, because if you don’t fail, there’s no chance you’re going to innovate.

Alexander Osterwalder: [00:42:36] Okay. There is no company on the planet that can innovate without failure. So, you need to embrace it. You need to make it okay. And take Jeff Bezos again, he says, “Of course, nobody likes failure. We don’t want that, that is never the goal, but it’s an inevitable side product.” So, the reason I’m pushing back is because when people try to hide failure, everybody tells me, “Alex, don’t talk about failures, talk about learning.”

Alexander Osterwalder: [00:43:01] But then, we’re hiding failure. And as long as failure is a stigma, nobody will take the risk to innovate. So, as long as you hide that, that failure is part of innovation, people will not because most people who want to make a career in a company, they know they can’t fail. So, as long as failure is a stigma, you won’t get innovation. When you stop firing people because they experimented and failed, that’s when the innovators will stay.

Alexander Osterwalder: [00:43:29] And that’s why I’m pushing back a bit, of course, nobody wants failure, I agree, I’m pushing back because we need to embrace failure in a systematic way to minimize the cost and time of failure in order to maximize the success we’ll get from it. So, that’s the way I would frame it, because if we don’t embrace it in companies, we won’t get innovation. So, we need to make it an okay thing. Not the goal, of course, but an okay thing that is not stigmatized.

Scott Varho: [00:43:58] Yeah, that makes sense.

Jessica Hall: [00:44:00] Yeah. As we get close to time here and I keep wanting to go, but I know we like to ask all our guests two questions. And so, the first one is, what is the one thing you always look for that tells you if a team or an organization is a healthy one?

Alexander Osterwalder: [00:44:18] I’d say team alignment, right? Are they really, really, really aligned in the same vision but also aligned in their culture? I don’t think there’s a right or a wrong culture, but the team needs to actually just have the culture that works for all of them. And if I may add a second one, it’s psychological safety. And that has to do, again, with alignment. If you feel like people are not collaborating the right way, they can’t speak up, that’s something I like. I know others that like when people kind of have a different culture. I like teams that are aligned and have psychological safety because I think that’s the best of all worlds, where people will also feel safe. I’m not saying that’s the only way to succeed, don’t get me wrong, but that’s the type of organization or team I’m looking for.

Scott Varho: [00:45:07] Embracing failure, right? If we have the safety to be able to say things that are radical or that would foster that environment of innovation. Yeah, it makes sense. Sorry, Jess.

Jessica Hall: [00:45:18] I don’t think you could have alignment without psychological safety. A true alignment, because otherwise, people will be afraid to ask questions. I spent the last two days with a new client and just me poking at stuff made it so much easier. Like I’m going to ask lots of dumb questions, but then, all of a sudden, I was able to get their team to talk about stuff that I made it easy for people to talk about.

Jessica Hall: [00:45:43] Oh, wait. You think it’s this? I think it’s that. I don’t think if you’re safe, you can actually get aligned, because then, you’re either too scared or too embarrassed to call things out and say, “Oh, did you mean it like this? I thought we meant it like this” or actually, “No, we don’t agree”, but I don’t feel like I can say that to you because you’re more important than me.

Alexander Osterwalder: [00:46:05] Very possible. Very possible.

Jessica Hall: [00:46:09] The other question is what piece of technology, analog, software, or hardware, that is not your phone, no cheating, can you not live without?

Alexander Osterwalder: [00:46:18] I’d say drawing. So, like language is a technology. For me, drawing is a communication tool. So, with my co-author, Yves Pigneur, with my team members like Alan Smith or some of my co-founders, we draw while we talk. So, that’s why podcasts are very hard for me because I can’t visualize. But the drawing, what I mean with drawing is not making beautiful landscapes, those look terrible, but actually trying to visualize my ideas with a pen, or an iPad, or paper. So, it’s the drawing that I could not live without because I couldn’t express myself.

Jessica Hall: [00:46:57] Yeah. And I haven’t seen your new book, The Invincible Company, yet, but having read Business Model Generation, I think I want the paperback, the print version because it’s so visual, and you want to be able to kind of embrace it in that way. And I think having used the business model canvas many, many times with clients, it is the fastest way I know to get into an organization, because in one hour, I walk, I facilitate the conversation, and then all of a sudden, I’m like, at the end of the day, we’re like, okay, I got it, I know what we’re doing now.

Alexander Osterwalder: [00:47:32] That’s what visual thinking is. Yeah, absolutely. So, you put the finger on why I think visual is so important because it’s another language. Talking is one language, but you can accelerate that, leverage the language with visual skills, then everyone likes to call, you’re just talking blah, blah, blah, right? So, we need to do both. If we just draw, it’s not going to work. And by the way, The Invincible Company is ten times better from the content and the design perspective than Business Model Generation.

Jessica Hall: [00:48:05] Okay. So excited. When does it come out?

Alexander Osterwalder: [00:48:10] It’s out. It’s been out now for a couple of weeks, probably the worst period ever in the last 150 years to launch a business book. But since we write books that should be timely because I don’t think innovation is going to go away in the next five to 10 years, you got to take what you get. So, interesting period to launch a business book.

Scott Varho: [00:48:33] Or maybe, exactly the right time.

Jessica Hall: [00:48:34] Well, actually, I’d say it’s exactly the right time because I think everybody is, we, a lot of our clients, and I’ve done round tables in industry—sorry, in media and information services, in retail, and health care, everyone’s now having to reckon with a whole new set of things, where do we continue to make continuous improvements? What are the new bets that we have to make? And they’re different than they were a couple months ago.

Alexander Osterwalder: [00:49:00] From a content perspective, you’re right, we could have called it The Resilient Company. But the problem is when Amazon doesn’t send books out anymore because it’s not seen as an essential good, which I think is actually essential good for companies, it would have helped them survive, but the books are just not shipped out anymore. So, it was more that it’s not from a content perspective, the world stopped in some areas, so some people were waiting for two months. They were writing me messages on Twitter and saying, “Alex, where’s this book? I can’t wait.” I was like, I’m not selling drugs here, I’m just selling business books. But people were excited and it was just hard to get these books into people’s hands.

Scott Varho: [00:49:40] May our books be as attractive as drugs. That would be awesome.

Alexander Osterwalder: [00:49:45] Maybe I shouldn’t have said that, right? So, now, people are going to say stuff about me.

Scott Varho: [00:49:50] Fantastic. Well, Alex, thank you so much. This has been a pleasure. And I mean, there’s so much that you’re talking about that resonates so deeply with us in how we advise business leaders to go to market, to experiment, really, to find what works. So, thank you so much. You shared some great insights with us today.

Alexander Osterwalder: [00:50:09] Thanks for having me. Wonderful conversation. Keep up the good work.

Jessica Hall: [00:50:13] Thank you.

Scott Varho: [00:50:14] Thank you so much.

Outro: [00:50:18] This has been an episode of The Innovation Engine, a podcast from 3Pillar Global. If you have questions, comments, or guest suggestions, email us at info@3pillarglobal.com or visit 3pillarglobal.com.