Overcoming the Challenges of Business Model Innovation

March 14, 2019

Many companies focus on optimizing the core business, executing on a business model that has long been established. However, being absorbed with the day-to-day can be detrimental if company leadership ignores opportunities and threats that lie ahead.

“[Business model innovation] does require that leadership spends at least 20 to 40 percent of their time on inventing the future,” Alex Osterwalder said on a recent IL Live conference call. “And most senior leaders are actually more concerned with managing the present, or fending off hostile investors that want short-term returns.”

Osterwalder developed the Business Model Canvas, a template that guides companies in designing and testing new business models. He also is the lead author of the book Business Model Generation, which has been translated into 30 languages.

“Can we get companies to shift towards not just managing the present, but inventing the future?” Osterwalder asked during the call. Osterwalder also discussed what makes business model innovation difficult; new kinds of metrics required; the need for a portfolio of innovation investments; and examples of companies that have found business model wins.

In addition to a detrimental, singular focus on the day-to-day, Osterwalder says that danger lies in equating technology and innovation.

“The first barrier is this myth that innovation equals technology,” he says. “There are a lot of opportunities around value propositions — so sometimes it can involve technology, sometimes it doesn’t.”

As an example, Osterwalder mentions the Wii, a video game console developed by Nintendo. While the Wii was less technologically-advanced that its competitors, the Xbox and Playstation, it appealed to a new market.

“The Xbox [and] the Sony Playstation Two at the time…were superior technology-wise,” Osterwalder said. “What was different about Nintendo was that they targeted it at a new segment, casual gamers, with a business model that was slightly different, because it made money on the consoles and on the royalties.”

A C-Level Entrepreneur?

According to Osterwalder, a lack of power in the innovation group at some companies creates another barrier to exploring new business models. In order to increase the influence, Osterwalder suggests creating a C-suite position for an executive in charge of growth.

“[What] we call…the Chief Entrepreneur and the Chief Executive Officer should have the same amount of power. One looks at the future, and one looks at the present,” Osterwalder says. “And when you have business models that get to a certain level, the entity that’s focused on the future hands over that business to those who are good at managing and scaling existing business models.”

M&A Versus Internal Innovation

Osterwalder also recommends that companies diversify their business models both through acquisitions and through creating new offerings internally.

“[O]ne doesn’t exclude the other… In some situations you want to acquire. In some situations, you want to invest, and in some situations, you want to grow,” he says. “The way that Amazon innovates, its a lot of home-grown and [simultaneously] big acquisitions.”

According to Osterwalder, acquiring businesses has become more difficult and expensive over time. Companies therefore have to be smarter about the acquisitions they choose to make.

“And even if you do acquisitions big or small, you’ll make better acquisitions if you’ve learned internally,” he says. “If you haven’t done the customer discovery internally in the market with stakeholders, you’ll make very bad acquisitions, because you haven’t learned enough to learn what is really required.”

During the call, Osterwalder emphasized that companies that refuse to face the future and develop new business models run the risk of irrelevance. He points to the effects a closure has on workers and communities.

“Some people say, ‘Well it’s just the life cycle of companies — some of them disappear,'” Osterwalder says. “But when a large player, take GE for example, is going away or changing substantially, tens of thousands of jobs are at stake. … [T]here’s a moral obligation to a certain extent to help large companies reinvent themselves, so we can create some stability for the people who work there.”

‘Ideas are Not the Problem’

Osterwalder closed by noting that most companies are not short on ideas or talented people — but often they are trapped in organizations that can’t figure out how to make the best use of them. “I don’t think the people are missing,” he says. “People are never the problem. I don’t think the ideas are missing. Ideas are not the problem. It’s really putting in place the right organizational structures, the right incentives in terms of metrics — and that is in the field of leadership. A lot of the things are there. What we don’t have yet is enough power in innovation.”

“I don’t walk away from these challenges,” he continues. “I try to help leaders understand what this is about. … Leaders are extremely good today at managing the existing [business], and that’s what they were rewarded for for most of their careers. We do need to bust a couple of innovation myths to unlock, unleash what is already in 90 percent of the companies. It’s really about unlocking, unleashing what is already there.”