Book Reviews - Business Design Digital

The Invincible Company

by Alexander Osterwalder et al.

The Invincible Company is the latest book by Alexander Osterwalder and Strategyzer (published this April). It takes a more holistic view on innovation: it does not look at a single innovation project but at the innovation portfolio and the organization enabling it.
 
To facilitate this it introduces a set of new tools. The portfolio map shows the development in the life cycle of an innovation from explore to exploit portfolio. It can be used to track many innovations and to make sure to develop a portfolio of ideas instead of putting all eggs in one basket.

The explore phase is about searching for new ideas and uses some well-known tools, including the business model canvas and ways of testing (see also Testing Business Ideas below). It also introduces a project scorecard to rank the innovations in the explore phase. A library of 27 successful business model patterns (based on the business model canvas) completes this part.

The exploit portfolio focuses on growing existing businesses and maps them similar to the growth-share matrix. The corresponding selection of 12 business model shifts shows examples of business model innovation in existing businesses.

Another section is dedicated to innovation culture. The culture map helps to define desired outcomes, identify enablers and blockers of innovation (e.g. innovation has no leadership attention) and design supporting behaviors. The proposed company structure envisions a chief entrepreneur reporting directly to the board.
In addition, innovation is seen as an independent skill and demanded to be a career path within the organisation.
 
Overall, the book recombines and adds to former Strategyzer books and focuses less on single innovation projects and more at the strategic level, innovation portfolio and culture. I like the bold demand for a chief entrepreneur at CEO level and the inclusion of non-US company examples. The book has the familiar fine collection of tools, examples and patterns, presented in a very accessible way (the responsible designers got credited on the cover).

Testing Business Ideas

by David J. Bland and      Alexander Osterwalder 

I had another look at Strategyzer’s Testing Business Ideas, published last year.

It follows the development of a (single) business idea from exploration to execution. Along the way the focus is on reducing uncertainty within the business by increasing fidelity (and costs) of the experiments that we run to test assumptions.

The book features a comprehensive library of 42 experiments, grouped in discovery and validation phase. The experiments are presented in detail with up to 4 pages each and ranked by evidence strength and costs. They include classics such as paper prototype, landing page and clickable prototypes but also more advanced versions such as life-sized prototypes and mash-up (create your mvp from existing services). I especially like the example experiment sequences per industry that suggest a suitable set of experiments (e.g. for a b2c service, customer interview, followed by search trend analysis, then online ad and simple landing page etc.).

Overall a good introduction to testing in business model design and a handy manual for running your own tests.

Monetizing Innovation

by Madhavan Ramanujam and Georg Tacke

For Business Designers pricing is a major topic in several occasions, including pricing your value proposition to capture the value you created, introducing (new) products to (new) markets, or changing an organization's pricing strategy. Pricing is usually also one of the most critical assumptions for future revenue. It is crucial for the validity of your financial model but also notoriously difficult to predict. Monetizing Innovation gives a comprehensive introduction to the main topics around pricing and a tools to streamline the process. And who would be better to write about it than two partners of a pricing consulting firm (Madgavan Ramanuham and Georg Tacke).
 
Four monetization failures
They start with the claim that all failures in the monetization of innovation can be divided into four categories:
feature shock – too many features and thus overpriced
minivation – priced too low
hidden gem – undermarketed because outside of core business
undead – brought to market but unwanted by customers
It is unclear how they got to that categories but that does not harm the usefulness of the rest of the book.
 
Pricing Concepts
Each subsequent chapter introduces a pricing concept, of which the most important are:
Willingness to pay: To know the price that is acceptable for your customer is crucial for all following topics. You need to test it early on. The authors offer tools, I am surprised that they does not mention Van Westerdorp though.
The price elasticity curve helps to choose a maximizing pricing strategy and will be part of your business case calculations.
Bundling: the book features a nice exercise that shows how intelligent bundling can increase your revenue by more than 30% without changing the underlying products. The right selection of features, customer segments and different offer sizes are part of your bundling strategy.
Segmentation: categorize your customers not based on demographics but on their needs and willingness to pay.
Monetization model & revenue streams – how you charge is as important as what you charge. Here we meet old friends: sale of services instead of products, subscription models, dynamic pricing, auctions, freemium.
Behavioral pricing: the authors describe six tactics to address the irrational part of your customers and ways to test them.
Pricing strategy: balance short and long term gains. This includes pricing integrity: do not lower your prices too quickly because of slow customer adoption or because of a competitor’s move. That was actually a mistake that I have to blame myself for at my first start-up.
The introduction to pricing concepts is rounded off by detailed example cases from Porsche, LinkedIn, Uber and others.
Overall Monetizing Innovation offers a comprehensive and hands-on introduction to pricing that will give you a lot of material, tools, and a process for your next pricing or broader innovation project.

Financial Intelligence

by Karen Berman and Joe Knight

Business Designers deal with financial statements in different stages of the Business Design process, wether it is analyzing industries and organizations, planning financial models for innovation, or managing their implementation.
 
How to read financial statements
People, who – like myself – have no formal finance education can be easily intimidated by financial statements, especially the balance sheet. Financial intelligence counters this reservation with accessible language and real-life examples.
 
The authors demonstrate that finance is less an exact science and more an art with room for interpretation and creative design (not to say manipulation, see for example the Enron case on page 168).
 
The book is organized around the three financial statements: income, cashflow, and balance sheet.
After introducing the income statement, the authors discuss the importance of when to recognize sales and what it means to be "above or below the line” of general & admin expenses – and how it influences the managerial attention your department gets.
The balance sheet is said to reveal the most about a company, but always was difficult for me to read. The authors explain it with the freedom accounts have in bookkepping which also makes it difficult to compare across companies (they advice to take close notice to the appendices of financial statements). Naturally, they discuss details on assets, liabilities and equity and why the balance sheet balances.
The cashflow statement is the most difficult to be creative about (that’s why Warren Buffet likes it) and is the most important one in the early growth stage of a company.
To highlight the dependencies between the three financial statements exercises for the reader enable her to follow transactions through the statements.
Ratios - going beyond return on invest - are introduced. I was always astonished when my colleague with a strong finance background divided two seemingly unrelated numbers, e.g. average inventory and cost of goods sold per day and obtained the average time of inventory in the system. In addition, more efficiency rates are discussed and rates on profitability, leverage, and liquidity.
The book closes with a look on the numbers that investors are interested in and how to create a financially intelligent organization.
 
In summary, Financial intelligence is a great introduction to financial statements for non-finance professionals and makes the sometimes dry topic easy to digest and apply.