Exponential Organizations: Why new organizations are ten times better, faster, and cheaper than yours (and what to do about it)

by Salim Ismail

Large companies must identify and track disruptive ExOs with the aim of observing, partnering with, investing in and/or acquiring them. And they must do so as early as possible to lower the investment threshold needed and to pre-empt the competition. The perfect moment to engage with an ExO is when the startup has real traction and is just emerging as a market leader. A classic example of such timing took place in 2005 when Google bought YouTube for $1.6 billion.

The real question then is not whether to acquire an ExO, but when to partner with an ExO, when to invest in one and when to acquire it.

A corporation should look to create an internal ExO when: An opportunity is one to two adjacencies away from the company’s core business—perhaps a different business model, buyer, user or go-to market. Urgency is low—there is still time until the market’s inflection point. The company is able to hire the necessary talent. This approach typically maximizes control and minimizes costs for those markets that must be “owned” given their strategic nature.

Acquisition is usually the most appropriate path when a market is strategically imperative to “own” but you face the following obstacles: It is difficult to hire the right talent. The market inflection point is upon you. The opportunity is too far removed (3+ adjacencies) from the corporation’s prevailing model. In this case, you must judiciously manage the post-merger integration to ensure that the corporation’s processes do not overwhelm the acquiree and destroy value.

When there is no immediate strategic need to own, a corporation can partner with an external ExO—akin to dating before marrying—to learn more about the market and the n...

An investment in an external ExO may be the best move in cases where it makes sense to test the waters—to watch and learn about an emergent opportunity with an eye to...

Recommendation: Implement a program to identify, partner with, invest in or acquire the ExOs in y...

The methodology behind Scaling Edges is built on the following basic guidelines: Find an edge in the form of an emerging business opportunity that has the potential to scale quickly and become a new core for the business. Line up a changemaker (or team of changemakers) who understands and embraces that edge opportunity. Place the changemaker/team of changemakers outside the core organization. Use the Lean approach and experiment with new initiatives to accelerate learning. Starve the team by providing little in the way of help, money or other resources. Encourage the team to seek leverage by connecting with other companies and participating in an ecosystem that can help accelerate growth. Point the ExO outward. The fledgling enterprise should create a new market or product area, NOT cannibalize the core product suite—at least in its early stages.

Another factor contributing to their success was that the new companies also had a good sprinkling of ExO attributes, including: Full-decision autonomy with distinct processes and procedures. Small, agile and bootstrapped cross-functional startup teams responsible for building new businesses from the idea stage through to commercialization. The ability to iterate on multiple types of innovation (business model, go-to-market, etc.) beyond traditional product level innovation. Iterative in-market testing of prototypes to customers with a goal of accelerated learning.

Recommendation: Move three proven changemakers in your enterprise to the edges of the organization and unleash them as ExOs to disrupt other markets. Learn how they interact with the mother ship, and then add more.

Recommendation: Hire both internal and external Black Ops teams and have them establish startups with a combined goal of defeating one another and disrupting the mother ship.

Recommendation: Start an internal accelerating technologies lab, leveraging core competencies and aiming for moonshot innovations at a budget price.

Recommendation: Find an incubator or accelerator that is a good fit for your organization. Partner with it or, if it is of insufficient scale for your needs, fund it. If an incubator or accelerator doesn’t exist, create one!

These days every company finds itself generating mountains of data, little of which is actually put to use. That’s a pity, because were companies to actually analyze some of the data they collect, they would gain extraordinary insight into their products, services, distribution channels and customers. Yet another reason to use algorithms and data is that most new business models are information-based. Physical assets don’t scale exponentially, but digitized assets lead to new use cases, partners, ecosystems, rules and business models.

What, exactly, should learning Dashboards track? Here are a few suggestions: How many (Lean Startup) experiments or A/B-tests did Customer Service run last week? Marketing? Sales? HR? How many innovative ideas have been collected over the past year? How many have been implemented? What percentage of total revenues is driven by new products from the last three years? The last five years?

Objectives and Key Results (OKRs) are also important metrics for corporations, even though OKRs are most important in new startups where high growth rates in employment necessitate a shorter feedback loop cycle. But big companies also need them because OKRs: Encourage disciplined thinking (major goals will surface). Increase effective communication (everyone learns what is important). Establish indicators for measuring progress (shows how far along company is). Focus effort (and thus synchronize the organization).

However, they found there are nine other types of innovation to track in a balanced way across an organization: Profit Model: How you make money Network: How you connect with others to create value Structure: How you organize and align your talent and assets Process: How you use signature or superior methods to do your work Product Performance: How you develop distinguishing features and functionality Product System: How you create complementary products and services Service: How you support and amplify the value of your offerings Channel: How you deliver your offerings to customers and users Brand: How you represent your offerings and business Customer Engagement: How you foster compelling interactions

Apple’s formula has been to: Leverage core design capabilities. Form small teams of changemakers extracted from the larger organization. Send those teams to the edge of the organization. Combine design with cutting-edge new technology. Utterly disrupt a legacy market.

[Note: all assessments in this chapter were made by the authors using the Exponential Diagnostic Survey found in Appendix A. Twenty-one questions are scored from one to four. A score over 55 indicates an ExO.]

In 2007, the Guardian offered a free blogging platform for thought leaders and created online forums and discussion groups [Community and Crowd]. Developers offered an open API to the paper’s website so they could leverage content on the site [Algorithms]. Investigative reporting for the millions of WikiLeaks cables fully crowdsourced [Community & Crowd].

Here’s how it works: If you’re a manager at Amazon and a subordinate comes to you with a great idea, your default answer must be YES. If you want to say no, you are required to write a two-page thesis explaining why it’s a bad idea. In other words, Amazon has increased the friction entailed in saying no, resulting in more ideas being tested (and hence implemented) throughout the company

As Bezos says, “If you’re competitor-focused, you have to wait until there is a competitor doing something. Being customer-focused allows you to be more pioneering.”

It’s important to note that the data informs but does not decide.

Remember the example in Chapter One of the Buenos Aires car wash, which saw a 50 percent drop in revenues due to better weather forecasting?

And as we also saw with our Argentinean car wash, although data is often readily available, it isn’t always being interpreted.

The age of CRM is over, replaced by Vendor Relationship Management (VRM), a term coined by Doc Searls from Harvard University. VRM is an extension of the intention economy, and VRMs offer the ultimate in customer-driven marketplaces (e.g., Uber, BlaBlaCar). Consumers own their own personal data and expose demand and purchasing intentions with different vendors in the cloud, mostly in real time. CRM is initiated by companies, VRM by customers.

More subscriptions versus one-off sales due to access versus ownership trend; more apps; more connected products and more cradle to cradle and Circular Economy; more freemium models (free and paid—e.g., the horribly named “tryvertising”). New fee models, such as API fees, platform licensing, syndication fees and virtual goods.

In the same way that Internet communications have seen costs drop to near zero, we expect to see internal organizational and transactions costs also fall to near zero as we increasingly information-enable and distribute our organizational structures. Ultimately, in the face of such low transaction costs, we anticipate what we’re calling a Cambrian Explosion in organizational design—everything from community-based structures to virtual organizations (see Ethereum) that will be small, nimble and extensible.

point. He believes that what we’re seeing is a new economic system emerging for the first time since the rise of capitalism, a new world of very low or zero marginal costs, one that he refers to as the Collaborative Commons.