Today we are witnessing how corporations designed for success in the 20th century fail in the 21st. Who is to blame and what to do? We decieded to break down the theory of Salim Ismail, who is a sought-after speaker, business strategist, and entrepreneur based in Silicon Valley. Ismail is firmly convinced that traditional corporations will soon give the wall to the new breed of business — exponential organizations.
Let’s consider companies like Valve, Airbnb, Tesla and GitHub. What way are they alike? They all represent a new breed of companies that utilize the power of exponential technologies, from groupware and data mining to synthetic biology and robotics. And the founders of those new companies might become the leaders of the world’s economy for the foreseeable future.
The lifespan of a company is going to get even shorter in the years to come as giant
corporations aren’t just forced to compete with but are annihilated by the companies listed above. However, Ismail claims, there is nothing wrong with that. We’ve learned how to scale technology, and now it’s time we learned how to scale organizations. This new age calls for a different solution to building a new business, to improve rates of success and to solving the challenges that lie ahead. That solution is the Exponential Organization.
Salim Ismail defines an Exponential Organization (ExO) as 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, Exponential Organizations are built upon information technologies that take what was once physical in nature and dematerialize it into the digital, on-demand world.
The theory is based on the well documented sixty-year history of Gordon Moore’s Law — basically, that the price/performance of computation will double every eighteen months. Ray Kurzweil calls this the Law of Accelerating Returns (LOAR) and shows that doubling patterns in computation extend all the way back to 1900, far earlier than Moore’s original pronouncement.
The driver fueling this phenomenon is information. Once any domain, discipline,
technology or industry becomes information-enabled and powered by information flows, its
price/performance begins doubling approximately annually.
Once that doubling pattern starts, Ismail notes, it doesn’t stop. Those enterprises that don’t jump aboard soon will be left on the ash heap of history, joining Iridium, Kodak, Polaroid, Philco, Blockbuster, Nokia and a host of other once-great, industry-dominant corporations unable to adapt to rapid technological change.
Our organizational structures have evolved to manage scarcity. The concept of ownership
works well for scarcity, but accessing or sharing works better in an abundant, information-based world where linear structures just don’t work.
However, history and common sense make clear that you cannot radically transform every part of an organization — and accelerate the underlying clock of that enterprise to hyper-speed — without fundamentally changing the nature of that organization. Which is why, over the last few years, a new organizational scheme congruent with these changes has begun to emerge. Salim calls it the Exponential Organization precisely because it represents the structure best suited to address the accelerated, non-linear, web-driven pace of modern life. And while even cutting-edge traditional companies can only achieve arithmetic outputs per input, an ExO achieves geometric outputs per input by riding the doubling-exponential pattern of information-based technologies.
Rather than using armies of people or large physical plants, Exponential Organizations are built upon information technologies that take what was once physical in nature and dematerialize it into the digital, on-demand world
To achieve this scalability, new ExO organizations such as Waze are turning the traditional organization inside out. Rather than owning assets or workforces and incrementally seeing a return on those assets, ExOs leverage external resources to achieve their objectives. For example, they maintain a very small core of employees and facilities, allowing enormous flexibility as margins soar. They enlist their customers and leverage offline and online communities in everything from product design to application development.
Two key factors enabled Waze to succeed, and those two factors hold true for all next-generation ExO companies: Access resources you don’t own. In Waze’s case, the company made use of the GPS readings already on its users’ smartphones. Information is your greatest asset. More reliable than any other asset, information has the potential to double regularly. Rather than simply assembling assets, the key to success is accessing valuable caches of existing information.
It now takes an average of between 250 and 300 days for a typical Consumer Packaged Goods
(CPG) company to move a new product from invention to retail stores’ shelves. A pioneering Exponential Organization in the same industry accomplishes this same
cycle in just 29 days.
There are two fundamental drivers that enable ExOs to achieve this level of scalability. The first
is that some aspect of the company’s product has been information-enabled and thus,
following Moore’s Law, can take on the doubling characteristics of information growth. The
second is that thanks to the fact that information is essentially liquid, major business functions
can be transferred outside of the organization— to users, fans, partners or the general public.
Based on the Salim’s research — which includes the top one hundred fastest-growing startups
worldwide over the last six years — they have identified common traits across all ExOs. They
include a Massive Transformative Purpose (MTP) that reflect the internal mechanisms and externalities they’re leveraging to achieve exponential growth.
Massive Transformative Purpose (MTP) Exponential Organizations, almost by definition, think BIG. There’s a good reason for that: if a company thinks small, it is unlikely to pursue a business strategy that will achieve rapid growth. Even if the company somehow manages to achieve an impressive level of growth, the scale of its business will quickly outpace its business model and leave the company lost and directionless. Thus, ExOs must aim high.
Ismail muses that now is perhaps the best time in the history of business to build a new enterprise. The confluence of breakthrough technologies, acceptance (and even celebration) of entrepreneurship, different crowdsourcing options, crowdfunding opportunities and legacy markets ripe for disruption — all create a compelling (and unprecedented) scenario for new
company creation. Furthermore, traditional risk areas have been mitigated like never
To beat the odds and risks, Ismail recommend you to follow these steps while creating your startup:
Step 1: Select an MTP (Massive Transformative Purpose). It is critical that you are excited and utterly passionate about the problem space you plan to attack.
Step 2: Join or Create Relevant MTP Communities. The collaborative power of communities is critical to any ExO. Whatever your passion (let’s say you dream of curing cancer), there are communities out there filled with other passionate, purpose-driven people devoted to the same crusade.
Step 3: Compose a Team. The key to putting together a successful ExO founding team is that everyone shares a passion for the MTP.
Step 4: Breakthrough Idea. It is essential to leverage technology or information in some way to transform the status quo. ExOs are not about incremental improvement in a marketplace. They are about radical change.
Step 5: Build a Business Model Canvas. At this stage, it is important that the BMC be simple and not overthought. Experimentation will navigate you to the best path and provide the next level of fidelity.
Step 6: Find a Business Model. It is important to understand that if you’re going to achieve a 10x improvement, there’s a strong likelihood that your company will require a completely new business model.
Step 7: Build the MVP. A key output of the Business Model Canvas is what’s called the Minimum Viable Product, or MVP. The MVP is a kind of applied experiment to determine the simplest product that will allow the team to go to the market and see how users respond (as well as help find investors for the next round of development).
Step 8: Validate Marketing and Sales. Once the product is being used in its chosen market(s), a customer acquisition funnel will need to be established to help drive new visitors to the product. Its role is to qualify potential customers and convert them into users and paying customers.
Step 9: Implement your ExO.
Step 10: Establish the Culture. Establishing a corporate culture starts with learning how to effectively track, manage and reward performance. And that begins with designing the OKR system.
Step 11: Ask the Key Question Periodically. How will you drive the marginal cost of supply towards zero?
Step 12: Building and Maintaining a Platform. The crucial step is exposing the data in the form of an open platform. Open data and APIs can be used such that an ExO’s community develops valuable services, new functionalities and innovations layered on top of the platform by remixing published data with their own.
Featured image: Unsplash
Source: Exponential Organizations by Salim Ismail