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The transformative effects of digitalization have upended entire industries – publishing, music, movies, retail, gaming, and others. Sensors, artificial intelligence, micropayments, driverless vehicles, and tools such as virtual reality and 4D printing will change every business. Leaders must move faster or face oblivion.
“An Exponential Organization (ExO) is one whose impact (or output) is disproportionally large – at least 10x larger – compared to its peers because of the use of new organizational techniques that leverage accelerating technologies.”
“Rather than using armies of people or large physical plants, ExOs are built upon information technologies that take what was once physical in nature and dematerialize it into the digital, on-demand world.”
Traditional, linear companies arose in response to scarcity. Limited supplies of land, materials and other resources meant organizations succeeded by acquiring rare things and protecting them with hierarchies, rules and structure. Today, digital information-based “Exponential Organizations” (ExOs) use data – the most valuable resource – for free. For example, Waze turns shared vehicle traffic volume and speed into information for drivers. Google indexes free website data; Facebook packages personal information into valuable content.
“It is very likely that a decade from now, the job of the CEO will be so completely revolutionized as to deserve a new title: Chief Exponential Officer.”
“For five decades, predictions around Moore’s Law have promised acceleration, and we are now seeing what that really means.”
Linear companies set up protective barriers and perceive opportunities through that lens. When leaders identify an exponential opportunity, company size and bureaucracy can prevent them from capitalizing on it. For example, Google took two years to develop and launch Google+. By then, faster-moving Facebook had already captured the market.
“The era of traditional, hierarchical market domination by dinosaur companies is coming to an end. The world now belongs to smarter, smaller and faster-moving enterprises.”
“The ability to fail is much easier in software and information-based environments because iteration is so much easier.”
ExOs share a few crucial characteristics: With a foundation of data and information, they tend to follow Moore’s Law by doubling in size every 18 months or so. They use free resources – information that fans, users and customers provide – to build businesses. Lacking infrastructure, they grow without constraints. For example, Airbnb owns no rental properties, but in just a few years it has become one of world’s largest lodging companies.
“No matter how promising its product or premise, unless an ExO is able to optimize the engagement of its community and crowd, it will wither and fade.”
“Entrepreneurial success rarely comes from the idea. Instead, it comes from the founding team’s never-say-die attitude and relentless execution.”
Attributes of ExOs
Exponential organizations develop a unique and powerful “Massive Transformative Purpose” (MTP). An MTP features a compelling mission along with aspirational goals to inspire passionate communities of fans, customers and employees. Ten traits stemming from the MTP set ExOs apart. The first five focus externally and correspond to the acronym SCALE; the next five look internally and align with the acronym IDEAS:
“Constant experimentation and process iteration are now the only ways to reduce risk.”
“Perhaps the most critical step in building an ExO involves establishing its culture.”
- “Staff on demand” – ExOs deploy small internal workforces. They meet demand by tapping contract talent. They understand that the smartest individuals don’t work for them, and that permanent workforces deteriorate over time in terms of knowledge and skills. Outsiders bring new ideas and fresh thinking.
- “Community and crowd” – Exponential organizations build active communities that share interests. ExOs grow while refereeing their communities and sparking “peer-to-peer” engagement. They leverage the crowd for ideas and work. They know millions of intelligent people spend billions of hours for free on inspirational MTPs.
- “Algorithms” – ExOs use data to inform every decision. They create algorithms to understand how users behave.
- “Leveraged assets” – ExOs exploit other people’s assets, such as your car for Uber or your spare bedroom for Airbnb. They only acquire assets they cannot easily leverage.
- “Engagement” – ExOs use games, challenges, quizzes and competitions to tap the natural competitiveness of people in their communities and to engage them in creating value. The X Prize, for example, worth $10 million, generated intense interest and competition in building a commercial spacecraft. It resulted in the development of SpaceShipOne, which Virgin Galactic will use to take customers into space.
- “Interfaces” – In your ExO, you will need mechanisms to manage interactions with your growing communities. Netflix ran an incentive program for a better search algorithm and received more than 51,000 entries. It built a system to sort, rank and rate them. Uber uses an efficient method to match drivers to customers. These interfaces grow with the ExO.
- “Dashboards” – ExOs use “Objectives and Key Results” (OKRs). OKRs measure fast-moving, fast-changing company goals and provide crucial, rapid feedback to employees. OKRs roll up into real-time dashboards that track every critical growth metric and show the results to everyone in the organization.
- “Experimentation” – Through low-cost, low-risk and rapid trial and error, ExOs tweak and learn their way to success. The old top-down, risk-avoidance ways no longer work.
- “Autonomy” – ExOs and many larger organizations realize that less hierarchy and centralized control lead to quicker, more innovative operations. Many successful firms, including Zappos, W.L. Gore & Associates and Southwest Airlines, devolve decision making to “self-organizing” teams and give individuals broad freedom to choose their work tasks.
- “Social technologies” – Inside ExOs, corporate social networks like Yammer connect employees to each other, to stakeholders and to real-time information. ExOs share schedules, task lists, files and virtual workspace, allowing people to collaborate from anywhere, anytime.
“For the first time in history, entrepreneurs can validate market demand before building the product.”
“Now that the asteroid of digitized information has hit, the global economy has changed forever.”
The “Nine Dynamics”
The “ExO ecosystem” expands and draws its power from the following truths:
“If you think the rate of innovation has been fast in recent years, let me be among the first to tell you: You haven’t seen anything yet.”
- “Information accelerates everything” – As industries digitize, hypergrowth follows. When photography switched from analog to digital in the mid-1990s, consumers went from processing 700 million rolls of film to the equivalent of 8 trillion within 10 years.
- “Drive to demonetization” – The Internet forces ExO marketing costs to nearly nothing. Crowdsourcing can reduce product development expenses. A high Net Promoter Score – meaning customers would recommend you to a friend – reduces sales costs. Supply costs vanish through “collaborative consumption,” with users providing cars, boats, rooms and apps through an organizing platform like Apple’s App Store, Uber and Airbnb.
- “Disruption is the new norm” – New entrants bring no preconceived notions, have little overhead, and use impassioned communities to move quickly and cheaply. Ideas trump the marketing and production advantages that established firms enjoy, leading to inevitable disruption by small upstarts.
- “Beware the expert” – Experts seldom solve challenges or come up with solutions in their fields; outsiders do. Kaggle runs “incentive competitions” online and finds that domain experts think they will solve the problem, but newcomers rout them quickly.
- “Death to the five-year plan” – Conventional organizations should abandon the five-year plan: It will lead your organization astray, given the current pace of change. Focus on your MTP and quick experimentation. Your community will show you where to go.
- “Smaller beats bigger” – Economies of scale, which favored large organizations, matter far less today. Speed and agility rule. As ExOs expand, they must morph into platforms with user communities that can grow forever.
- “Rent, don’t own” – Exponential organizations should possess very little. Leasing assets keeps costs low and agility high. For little expense, the cloud provides a better computing platform than the largest organizations with their own server farms. Rent staff members when you need them. In R&D, shared assets such as those supplied through TechShop provide access to the sophisticated and expensive development tools that only big companies used to own. To build a product, make sure you use affordable platforms like Quirky.
- “Trust beats control, and open beats closed” – Today’s workers, particularly those who are younger, demand autonomy, flexibility and openness. More and more, the work that people do requires advanced creativity, imagination and problem solving. You don’t get innovation in command operations. Instead, trust your labor force, give them freedom, and use modern technology to monitor and track their progress.
- “Everything is measurable, and anything is knowable” – Trillions of sensors will join the billions already in place, blanketing the Earth and relaying real-time data on every aspect of your life and the tools you use. Thousands of “low Earth” satellites will launch in the next few years, recording virtually all movement on the planet. Star Trek Tricorder-like medical diagnostic devices will revolutionize health care. ExOs will leverage these information streams to create new businesses.
Build an ExO
Most ExOs don’t possess all nine dynamics and all ten SMART and IDEA traits, but they still can disrupt and dominate their industries. They leverage crowdfunding, crowdsourcing, open platforms, the cloud and big data to marshal resources at little cost. Consider the three timeless obstacles that have typically constrained new ideas:
- “Technology risk (Will it work?)” – In the mid-1990s, an entrepreneur with a software idea needed about $15 million to get started. Now, about $100,000 will do. Dramatically lower costs reduce technology risk and allow faster and greater experimentation. Technology risk for information-based start-ups barely exists today.
- “Market risk (Will people buy?)” – Market risk belongs to yesterday. If you have an idea, buy the Google Adwords for it. If you get interest, crowdfund it. If you get enough preorders, build it.
- “Execution risk” (Can you do it?) – Of the three traditional risk areas, only execution risk remains. Figure out how to get the most from your teams, contributors and community. Build a business model that exploits new and inexpensive tools and data.
To build an ExO, follow as many of these 12 steps as possible:
- “Select an MTP” – What’s the big, powerful thing that lights you up and that will stir the passions of many? Make it your MTP.
- “Join or create relevant MTP communities” – Every exponential organization needs a community. Look on meetup.org; you will likely find an existing group whose basis is your MTP. Respect the community, and never betray it for the benefit of your company or idea.
- “Compose a team” – Assemble a compatible founding lineup of people with complementary vision and technical, design, business and execution skills who share your avid commitment.
- “Breakthrough idea” – Pursue a transformative goal. Aim to improve something by 1,000% or more. You’ll only succeed through perseverance and hard work. Such Herculean efforts need a big purpose to keep exhausted people motivated.
- “Build a Business Model Canvas” – Use the Business Model Canvas tool developed by Alexander Osterwalder to sketch your “go to market” strategy.
- “Find a business model” – To improve something 1,000%, you need a groundbreaking business plan. If your plan involves data and information – like most ExOs – give all or some of it away. Find other ways to monetize your efforts. Let some customers receive your offering before others, and offer customization tools to organize it or to teach people to use it better. Solicit voluntary payments.
- “Build the MVP” – Develop your offering or website only to “minimum viable product” standards. Put it out there for people to try. Quickly tweak it based on user feedback.
- “Validate marketing and sales” – Capture and track customer acquisitions, first impressions, retentions and referrals. Know what drives your revenue.
- “Implement SCALE and IDEAS” – Carefully choose those that best suit your exponential organization.
- “Establish the culture” – Creating your culture presents your most important and difficult challenge. Focus first on performance: how to recognize and reward staff members.
- “Ask key questions periodically” – Can you identify your customers? Can you articulate the problem you solve for them? Can you explain why your idea is 10 times better than anything that exists? Can you describe how you will promote and sell your offering? Can you ignite passionate customers and viral word-of-mouth referrals? Can you say how you will cut your supply costs to nothing? Is your product relevant right now?
- “Building and maintaining a platform” – Shift your product into a platform. To go from product to platform, build communities around your idea.
As you grow, think and behave like a start-up. Midsize organizations can become ExOs by adopting an MTP and multiple SCALE and IDEA traits. Large companies can morph into ExOs by embracing all or most of these principles.