If we discover that the business model you have chosen for launching the digital platform is not viable, would you be allowed to change direction or stop?”
We asked this question because the team had a short time frame before launch. With this constraint in place, we needed to know whether we could fully engage in the innovation practice of testing and iterating. The team’s honest assessment was that their senior executives had set the launch roadmap, and the team was under pressure to launch the platform on time.
This told Nico and me everything we needed to know. Our learnings would have minimal impact on the team’s launch plans. We had been brought in late, and now the team didn’t have the option to change direction. It felt more like testing would be done as a tick-box exercise.
Rather than waste time testing things we couldn’t change, we worked with the team and their leadership to identify the elements of their business model that they were open to iterating based on learnings. We then focused on these elements for the duration of the innovation sprint.
This approach could have been better, but it gave us a small opportunity to plant a seed within the company by showing the leaders how world-class innovation practices work. Over time, we were able to work with other projects at earlier stages using our Discovery Program, train a group of internal innovation coaches using our Coach Academy, and help the company develop its innovation practice.
At Strategyzer, we believe that every company should develop its own innovation capabilities. If the pharma team already had the necessary skills and capabilities, they would not have needed to bring in external coaching. Instead, they would have done the right things by testing and validating their business model before launch.
Over the past decade, we have learned a few lessons about what makes a world-class innovation practice supported by high-quality coaching within corporate settings. The elements of a world-class innovation practice are shared in the following sections. These will be described through the lens of three key innovation questions that every team, coach, and leader needs to stop and reflect on before deciding what to do next:
- Have we designed a breakthrough business model?;
- What needs to be true for this business idea to work?
- How close are we to finding a business model that works?
The Design-Test Loop
Before getting started, it is vital that every team, coach, and leader acknowledges and embraces two fundamental innovation principles:
- Having a nifty new product, technology, or service is different from having a great value proposition. You only have a great value proposition if your offering addresses key customer jobs to be done, pains, and gains.
- A great value proposition is not the same as a great business model. It is possible to make products or services that people want and lose money doing it. An essential part of world-class innovation practice is searching for and finding business models that are profitable and scalable.
To build world-class innovation practices, we recommend that innovation teams and coaches use the Design-Test Loop developed by David Bland and Alex Osterwalder in their seminal book Testing Business Ideas. Within this framework, teams work on their business ideas using two main iteration loops, the Design Loop and the Test Loop.:
- In the design loop, teams shape their business ideas to turn them into business models that have the potential to produce good returns.
- In the test loop, teams test the hypotheses underlying their business model to reduce the risk and uncertainty of their business idea.
This Design-Test Loop helps teams navigate the journey from idea to business. It is an excellent framework for addressing the three key innovation questions I mentioned earlier. Next, I will dive deeper into each question to illustrate how innovation practices work.
Question 1: Have we designed a breakthrough business model?
In the first step of the business design loop, teams ideate as many alternatives as possible based on intuition or some customer insights. During this step, the goal is to generate as many options as possible and not fall in love with our first idea.
In the second step, teams narrow down their alternatives and start prototyping. This can take the form of something as simple as sketching out an initial business model on the back of a napkin, then refining it using the value proposition and business model canvases.
In the final step, the team, with the help of their coach, assesses the business model they have mapped out. This is the most critical step in the design loop and is directly connected to the first key innovation question. In a typical organization, new business models are assessed by evaluating their potential to succeed and generate returns. But this is not the right question for coaches or leaders to ask during the design loop.
This is not the time to start picking apart the business model and challenging its potential to succeed in the market. We want the team to design like they are right. So, the right question focuses on the business model design and its creativity. In other words, has the team developed a breakthrough business model?
The coach is asking, is this business model design crazy enough?
Is the team pushing the boundaries? Or are they playing it safe and staying close to what the company already does? With this focus, coaches & leaders can inspire the team to be more innovative.
The best way for innovation coaches to inspire better design is by asking a set of open questions. In The Invincible Company, Alex Osterwalder and colleagues provide a catalog of the world's best business models. These innovative business models can be used to inspire better design. For example, coaches can inspire the teams to:
- Explore new customer segments by asking: How can we tap into new, untapped, or underserved markets with enormous potential?
- Consider new channels by asking: How could we increase market access and build strong and direct channels leading to our end customers?
- Explore new revenue models by asking: Which new revenue streams or pricing mechanisms could we introduce to capture more customer value or unlock unprofitable markets?
These are just a few examples of the open questions coaches and teams can ask themselves. The goal is to push the boundaries of design. We are trying to imagine beautiful possibilities and designing as if our ideas can’t fail. We haven’t started challenging whether the concept will work in real life. This is what comes next – but only after we are satisfied that our “Plan A” is a well-designed business model.
Question 2: What must be valid for this business idea to work?
Assuming we are happy with our business design, it’s time to move on to testing. The first step in the test loop is to map out and prioritize our hypotheses. In this process, we explicitly make the risks and assumptions that underlie our idea, then break these down into small testable pieces.
The second step is selecting and running suitable experiments to test our hypotheses. In this process, it is not the number of experiments that we run that will give us confidence that our idea has legs; instead, we care about whether the data we are gathering supports our hypotheses and the strength of that evidence.
The final step is to learn from the experiments we run. Does the evidence support or refute our assumptions? These insights allow us to persevere, pivot, or kill our idea.
The critical innovation question that drives the test loop is: what needs to be true for this business idea to work? We have now moved beyond designing like we are right to testing like we are wrong. The goal is to ensure our beautiful business model vision is not a hallucination.
It is also important to note that this innovation question is deliberately framed this way. Asking what needs to be true for an idea to work is a more open coaching question than leaders typically ask innovation teams. There often seems to be an expectation that teams should already know the answers to questions about the market potential of their ideas. And if they don’t, the idea is not worth investing in.
Our approach to testing is based on the notion that if teams are working on genuinely breakthrough business ideas, there will be a lot they don’t know. So the teams can make explicit the untested assumptions underlying their statements. Coaches and leaders have to bring a different mindset to this task. The focus should be on helping the teams map out all their risky assumptions, prioritize these assumptions and choose the suitable experiments to run.
Question 3: How close are we to finding a business model that works?
As the teams start running experiments, the data they gather will provide insight into whether their hypotheses are being supported or refuted. In this process, teams use their learnings from experiments to decide what to do next: persevere, pivot, or kill.
At the center of this decision-making is the business model the team is testing. Experiments are not run to test each hypothesis in isolation; the ultimate goal is to test whether the business model is viable. So at the end of every testing cycle or sprint, innovation teams and their coaches have to stop and reflect on their progress toward finding a profitable business model that works.
Before leaders decide whether to keep investing in a business idea, they have to evaluate the evidence the team is presenting through the same lens:
How close is this team to finding a business model that works?
We developed the Innovation Project Scorecard to help coaches and leaders evaluate team progress. The questions on the scorecard are aligned with the nine building blocks of The Business Model Canvas and the four sections of The Business Environment Canvas. The evaluation criteria for progress are based on the strength of evidence the teams have gathered, not opinion or conjecture (i.e., desirability, feasibility, viability, and adaptability).
Evaluating the progress from ideas to a profitable business helps decide what to do next. By assessing the strength of the evidence supporting each business model building block, teams can identify which blocks still need to be tested. What is the next most vital hypothesis to test to move the business idea forward? This will inform the choice for the subsequent experiments to run.
Teams must perform these cycles through the Design-Test Loop until a viable business model is found. When new lessons are learned, the business model can be updated, new hypotheses identified, and the next set of experiments run. This is why teams that can cycle quickly through the loop are faster at discovering whether their business idea is viable.
The role of the coach
The innovation practice described above is what the team at the pharmaceutical company should have been doing before they launched their digital platform. Unfortunately, the team did not yet have the right skills to do this type of work. Attending one of our upcoming Strategyzer master workshops can help teams develop these innovation skills.
Another solution for companies is to develop a group of internal innovation coaches. When Intuit was rolling out its Design for Delight (D4D) program, it recruited a group of design thinking coaches called “innovation catalysts.” Their role was to support innovation teams as they worked on their ideas. We created our upcoming Strategyzer Coach Academy for individuals who want to become world-class innovation coaches or companies with the ambition to develop their own group of innovation catalysts.
What makes a great innovation coach? When selecting coaches, companies should look for people with a significant interest in innovation methods and a passion for coaching other people to use innovation methods. When Intuit recruited its first cohort of coaches, they quickly learned that the best design thinkers do not necessarily make the best catalysts. Instead, the best design thinkers become suitable catalysts when they are also passionate about helping others do great work.
In our experience, the best innovation coaches have to be able to do the following:
Be a challenger: This involves challenging people’s preconceived ideas about what works in the context of innovation. A coach cannot be too afraid to give negative feedback to teams or give their negative feedback in too aggressive a manner. The best coaches can show teams the mirror without fear of humiliating them.
Be a facilitator: Some coaches need help to play a neutral role when working with a team. However, they have to somehow get teams to take bold and unexpected directions without telling them what to do or doing the work for them. Being a great facilitator is the innovation coach’s superpower. As noted earlier, using open-ended questions framed as “what-if” scenarios is one the best ways to inspire breakthrough design.
Provide practical advice: Innovation coaching is not about giving motivational speeches. People are looking for practical tools to use in their daily work. Innovation coaches should master the right tools to inspire excellent value propositions and business model design. They should also master the tools to help teams identify assumptions and test their business ideas.
A final thought
Having world-class innovation practices is essential for developing the right innovation culture within a company. However, these practices will only stick and scale if two other elements are present within the company. The first one is Leadership Support, with leaders who understand how innovation works and invest significant time to support the innovation process. The second one is Organizational Design, where innovation has power and legitimacy, experimentation is celebrated, and nobody gets fired for failing.
- Every company should develop its own innovation capabilities so that innovation teams have the right skills and capabilities.
- We recommend that the innovation team and coaches use the Design-Test Loop:
- In the design loop, teams shape their business ideas to turn them into business models that have the potential to produce good returns.
- In the test loop, teams test the hypotheses underlying their business model to reduce the risk and uncertainty in their business idea.
- There are three key innovation questions that every team, coach, and leader needs to stop and reflect on before deciding what to do next:
- Have we designed a breakthrough business model? Rather than picking apart the business model and challenging its potential to succeed in the market. We want the team to design like they are right. So, the first question to ask focuses on the business model design and how creative it is. Is the team really pushing the boundaries? Or are they playing it safe and staying close to what the company already does?
- What needs to be true for this business idea to work? If teams are working on breakthrough business ideas, there will be a lot they don’t know. This question allows teams to make explicit the untested assumptions underlying their ideas. Coaches and leaders focus on helping the teams map out all their risky assumptions, prioritize these assumptions and choose the right experiments to run.
- How close are we to finding a business model that works? The ultimate goal when running experiments is to test whether the business model is viable. So at the end of every testing cycle or sprint, innovation teams and their coaches have to stop and reflect on their progress toward finding a business model that works.
- A solution for companies wanting to scale innovation practice is to develop a group of internal innovation coaches, people with a significant interest in innovation and a passion for coaching other people.
- The best innovation coaches have to be able to do the following:
- Be a challenger: A coach must be bold and give positive feedback. The best coaches can show teams the mirror without fear of humiliating them.
- Be a facilitator: A coach has to get teams to take bold and unexpected directions without telling them what to do or doing the work for them.
- Provide practical advice: A coach gives teams valuable tools they can use in their day-to-day work (e.g. value proposition design, business model design, identifying assumptions, and testing business ideas).
- World-class innovation practices will only stick and scale if the company has leadership support and the right organizational design.