That was the bottom-line message offered by Alexander Osterwalder, co-author of Business Model Generator, in his Day Two keynote at the Front End of Innovation conference in Boston this week. As I learned in my days at Forrester Research, whether you are writing a research report or giving a speech, there’s nothing like starting off with a little fear, uncertainty and doubt (FUD) to get people’s attention.
Osterwalder introduced the crowd to his Business Model Canvas (BMC), which is a tool that allows people to make existing or new business models tangible so they can be discussed. There are 9 components to the BMC: Customer Segments, Customer Relationships, Channels, Value Propositions, Key Activities, Key Resources, Key Partners, Cost Structure, and Revenue Streams.
Osterwalder was able to demonstrate its applicability across a variety of businesses. His most interesting example was for the Nestlé Nespresso coffee machine. He demonstrated the power in having developed separate business models for the machines (straight retail, a very broad channel) and the coffee pods (new yet narrow channels like online, telephone, mail order, and a few Nespresso retail stores developed by Nestlé). Nestlé was able to create billions of dollars in profit by disrupting the traditional all-retail business model for coffee makers and coffee.
The best part of the story, though, came when Osterwalder told us how Nestlé’s failure to self-disrupt its Nespresso business could cost it those billions in profit. The patent on the Nespresso coffee pods – its primary Key Resource – expired last year, which means Nestlé will no longer be the sole distributor of the pods through its own channels. Osterwalder’s point: business models are like yogurt in the refrigerator: They are expiring, like it or not. By failing to disrupt itself before the expiration of the patent, Nestlé has put those billions in profits at risk.
With the crowd now familiar with the approach, we were asked to pair up and, using an interviewer/explainer approach and materials provided to us, fill out a BMC for one person’s actual product – in just 8 minutes. The fact that the capacity audience was able to do this within minutes of being introduced to the BMC is a testament to one of its key advantages: simplicity.
Osterwalder created a tiered system to rank companies based on their level of innovativeness with their business models. A successful business model is defined by analyzing its mechanics; this is accomplished by asking the following seven questions:
- Are there switching costs built into your product?
- Do you have recurring revenues?
- Do you earn money before you spend it?
- Do you have game-changing cost structure?
- Are you getting others to do the work?
- Are you scalable?
- Are you protected from competition?
The audience was asked to score our own businesses on a scale of 1 to 10 for each of these questions, and it was an eye-opening exercise. It’s unlikely that anyone awarded themselves 10s across the board – or even 5s, for that matter. The truly honest among the participants would likely have had at least a few 1s and 2s.
Osterwalder contends that the companies that compete on business models are the true innovative companies in the market. He shared a 4-level ranking system for companies based on their business model mechanics: Level 0 companies (“the Oblivious”) focus only on the product; Level 1 companies (“the Beginners”) use the BMC, but only as a checklist; Level 2 companies (“the Masters”) use the BMC well but haven’t shown themselves capable of self-disruption; and Level 3 companies (“the Invincible”) have a superior model, but use the BMC to constantly think of proactive new models before they need them.
When using the BMC to self-disrupt your own business model, Osterwalder urged the audience to embrace design thinking when developing new business models. Throwing away the first iteration of a new business model is a best practice: it’s part of the creation process, and allows you the freedom to explore alternatives and answer the question: “What could this become?” It forces you and your colleagues to challenge orthodoxies and think of something else that could result in true differentiation and advancement to the next Level.
What it means:
Many consultants and researchers have tried to devise ways of identifying and even ranking the most innovative companies using various metrics. Osterwalder’s approach is not as direct as comparing financial results, R&D spend, or patent registrations, but in my view, focusing on the business model and the changes and adaptations a company makes to its business model accurately captures the essence of what makes the most innovative companies that we all know and love (the Apples and Amazons of the world) invincible.
In fact, Osterwalder suggests that companies like 3M and Google, which are widely revered as being innovative, are actually Level 0 or 1 companies when you assess how they compete with business models. That contrarian position might elicit a reflexive response of “No, they aren’t” until you stop and think for just a moment about the staleness of their current business models. That’s not to say product innovation at 3M isn’t incredibly refined and impressive, nor am I suggesting that 3M won’t continue to be successful. The point is that there will be limits to the success of those Level 0 or 1 companies unless they explore the possibilities and long-term benefits of self-disrupting their own tired business models – before someone else does. So what level are you?
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Doug Williams, Chief Research Officer and Principal Analyst, leads the development of IX Research. Doug is the primary author of IX Research‘s syndicated research reports, and is responsible for the development of the IX Research Panel and IX Custom Research lines of business. A former analyst at both Forrester Research and JupiterResearch, he launched and led Forrester’s innovation and co-creation practice for product strategy professionals. He authored 36 highly rated Forrester Research reports on innovation, open innovation, and co-creation, and was the primary author and developer of Forrester’s Open Innovation playbook. Doug tweets from @DougWilliamsMHD.