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

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

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6Ds: Digitized, Deceptive, Disruptive, Dematerialize, Demonetize and Democratize.

There must be a better way to organize ourselves. We’ve learned how to scale technology; now it’s time we learned how to scale organizations. This new age calls for a different solution to building new business, to improving rates of success and to solving the challenges that lie ahead. That solution is the Exponential Organization.

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.

Archimedes once said, “Give me a lever long enough, and I’ll move the world.” Simply put, mankind has never had a bigger lever.

That is the very definition of a paradigm shift. There’s an important and foundational lesson illustrated in each of these anecdotes, which is that an information-based environment delivers fundamentally disruptive opportunities.

when you shift to an information-based environment, the pace of development jumps onto an exponential growth path and price/performance doubles every year or two.

Key Takeaways The experts in many fields will project linearly in times of exponential change. The explosive transition from film to digital photography is now occurring in several accelerating technologies. We are information-enabling everything. An information-enabled environment delivers fundamentally disruptive opportunities. Even traditional industries are ripe for disruption.

When you think linearly, when your operations are linear, and when your measures of performance and success are linear, you cannot help but end up with a linear organization, one that sees the world through a linear lens—as did even multi-billion dollar, technologically cutting-edge Nokia. Such an organization cannot help but have many of the following characteristics: Top-down and hierarchical in its organization Driven by financial outcomes Linear, sequential thinking Innovation primarily from within Strategic planning largely an extrapolation from the past Risk intolerance Process inflexibility Large number of employees Controls own assets Strongly invested in status quo

But each of these changes comes at great cost, because the flip side of size is flexibility. However hard they try, large companies with extensive facilities filled with tens of thousands of employees scattered around the world are challenged to operate nimbly in a fast-moving world.

Rapid or disruptive change is something that large, matrixed organizations find extremely difficult. Indeed, those who have attempted it have found that the organization’s “immune system” is liable to respond to the perceived threat with an attack. Gabriel Baldinucci, Chief Strategy Officer at Singularity University and a former principal at Virgin Group’s U.S. venture arm, has observed that there are two levels of immune responses. The first is to defend the core business because it’s the status quo; the second is to defend yourself as an individual because there’s more ROI for you than for the organization.

What makes traditional companies highly efficient at expansion and growth as long as market conditions remain unchanged is also what makes them extremely vulnerable to disruption.

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.

We have even found a simple metric that helps to identify and distinguish emerging Exponential Organizations: a minimum 10x improvement in output over four to five years.

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 reliably 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.

the real, fundamental question of our exponential age is: What else can be information-enabled?

The key outcome when you access resources and information-enable them is that your marginal costs drop to zero. Quite possibly the granddaddy of information-based ExOs is Google, which doesn’t own the web pages it scans. Its revenue model, the butt of many jokes ten years ago, has enabled Google to become a $400 billion company, a milestone it reached by essentially manipulating textual (and now video) information.

This search for new sources of information that can underpin new companies and businesses is at the heart of the revolution often labeled Big Data. By combining vast stores of data with powerful new analytical tools, there is an opportunity to see the world in a new way—and to turn the resulting information into new business opportunities.

Key Takeaways 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. While the information-based world is now moving exponentially, our organizational structures are still very linear (especially large ones). We’ve learned how to scale technology; now it’s time to scale the organization. Matrix structures don’t work in an exponential, information-based world. ExOs have learned how to organize around an information-based world.

“Any company designed for success in the 20th century is doomed to failure in the 21st

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.

In this chapter we will look at the Massive Transformative Purpose and the five external attributes that comprise SCALE.

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.

TED: “Ideas worth spreading.” Google: “Organize the world’s information.” X Prize Foundation: “Bring about radical breakthroughs for the benefit of humanity.” Quirky: “Make invention accessible.” Singularity University: “Positively impact one billion people.”

It’s important to note that an MTP is not a mission statement.

The most important outcome of a proper MTP is that it generates a cultural movement—what

That is, the MTP is so inspirational that a community forms around the ExO and spontaneously begins operating on its own, ultimately creating its own community, tribe and culture.

The biggest imperative of a worthy MTP is its Purpose. Building on the seminal work by Simon Sinek, the Purpose must answer two critical “why” questions: Why do this work? Why does the organization exist?

A strong MTP is especially advantageous to “first movers.” If the MTP is sufficiently sweeping, there’s no place for competitors to go but beneath it. After all, it would be very hard for another organization to pop up and announce, “We’re also going to organize the world’s information, but better.” Once companies realize this singular advantage we can expect a land grab of genuine MTPs in the near future.

Martin Seligman, a leading expert on positive psychology, differentiates between three states of happiness: the pleasurable life (hedonistic, superficial), the good life (family and friends) and the meaningful life (finding purpose, transcending ego, working toward a higher good).

Now that we understand the meaning and purpose of the Massive Transformative Purpose, it’s time to look at the five external characteristics that define an Exponential Organization, for which we use the acronym SCALE: Staff on Demand Community & Crowd Algorithms Leveraged Assets Engagement

For any ExO, having Staff on Demand is a necessary characteristic for speed, functionality and flexibility in a fast-changing world. Leveraging personnel outside the base organization is key to creating and running a successful ExO. The fact is, no matter how talented your employees, chances are that most of them are becoming obsolete and uncompetitive right before your eyes.

The reality is that most of the world’s smartest people don’t have the right credentials. They don’t speak the right language. They didn’t grow up in the right country. They didn’t go to the right university. They don’t know about you and you don’t know about them. They’re not available, and they already have a job.

“If you build communities and you do things in public,” he says, “you don’t have to find the right people, they find you.”

Typically, there are three steps to building a community around an ExO: Use the MTP to attract and engage early members.

Nurture the community.

Create a platform to automate peer-to-peer engagement.

Staff on Demand is hired for a particular task and usually via a platform like Elance. Staff on Demand is managed—you tell workers what it is they have to do. Crowd, on the other hand, is pull-based. You open up an idea, funding opportunity or incentive prize…and let people find you.

Machine Learning is the ability to accurately perform new, unseen tasks, built on known properties learned from training or historic data, and based on prediction.

Deep Learning is a new and exciting subset of Machine Learning based on neural net technology. It allows a machine to discover new patterns without being exposed to any historical or training data.

We believe it’s just the beginning, and that many more algorithm-focused ExOs will pop up in the coming years, harnessing what Yuri van Geest calls the 5P benefits of big data: productivity, prevention, participation, personalization and prediction.

To implement algorithms, ExOs need to follow four steps: Gather: The algorithmic process starts with harnessing data, which is gathered via sensors or humans, or imported from public datasets. Organize: The next step is to organize the data, a process known as ETL (extract, transform and load). Apply: Once the data is accessible, machine learning tools such as Hadoop and Pivotal, or even (open source) deep learning algorithms like DeepMind, Vicarious and SkyMind, extract insights, identify trends and tune new algorithms. Expose: The final step is exposing the data, as if it were an open platform. Open data and APIs can be used to enable an ExO’s community to develop valuable services, new functionalities and innovation layered on top of the platform by remixing the ExO’s data with their own. Examples here include the Ford Motor Company, Uber, Rabobank, the Port of Rotterdam, IBM Watson, Wolfram Alpha, Twitter and Facebook.

As with Staff on Demand, ExOs retain their flexibility precisely by not owning assets, even in strategic areas. This practice optimizes flexibility and allows the enterprise to scale incredibly quickly as it obviates the need for staff to manage those assets.

Non-ownership, then, is the key to owning the future—except, of course, when it comes to scarce resources and assets. As noted above, Tesla owns its own factories and Amazon its own warehouses. When the asset in question is rare or extremely scarce, then ownership is a better option. But if your asset is information-based or commoditized at all, then accessing is better than possessing.

Key attributes of Engagement include: Ranking transparency Self-efficacy (sense of control, agency and impact) Peer pressure (social comparison) Eliciting positive rather than negative emotions to drive long-term behavioral change Instant feedback (short feedback cycles) Clear, authentic rules, goals and rewards (only reward outputs, not inputs) Virtual currencies or points

Properly implemented, Engagement creates network effects and positive feedback loops with extraordinary reach. The biggest impact of engagement techniques is on customers and the entire external ecosystem. However, these techniques can also be used internally with employees to boost collaboration, innovation and loyalty.

“Human beings are wired to compete.”

“Gamification should empower people, not exploit them. It should feel good at the end of the day because you made progress towards something that mattered to you.”

To be successful, every gamification initiative should leverage the following game techniques: Dynamics: motivate behavior through scenarios, rules and progression Mechanics: help achieve goals through teams, competitions, rewards and feedback Components: track progress through quests, points, levels, badges and collections Gamification is not only used to tackle challenges and problems with the help of a community, it can also be used as a hiring tool.

An incentive prize creates a clear, measurable and objective goal, and offers a cash purse for the first team to reach that objective.

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.

and tools. In this chapter we’ve provided both: the MTP to elicit the passionate involvement of all stakeholders in a crusade to achieve a compelling larger vision; and the components of SCALE to build and engage the Community & Crowd, to use Staff on Demand and Leveraged Assets, and to leverage Algorithms.

Key Takeaways Exponential Organizations have a Massive Transformative Purpose (MTP) Brands will start morphing into MTPs ExOs scale outside their organizational boundaries by leveraging or accessing people, assets and platforms to maximize flexibility, speed, agility and learning. ExOs leverage five externalities (SCALE) to achieve performance gains: Staff on Demand Community & Crowd Algorithms Leveraged Assets Engagement

And just as the external attributes of the Exponential Organization can be encompassed with the acronym SCALE, so too can an ExO’s internal mechanisms be expressed with the acronym IDEAS. Interfaces Dashboards Experimentation Autonomy Social Technologies

Interfaces are filtering and matching processes by which ExOs bridge from SCALE externalities to internal IDEAS control frameworks. They are algorithms and automated workflows that route the output of SCALE externalities to the right people at the right time internally. In many cases, these processes start out manual and gradually become automated around the edges. Eventually, however, they became self-provisioning platforms that enable the ExO to scale. A classic example is Google’s AdWords, which is now a multi-billion dollar business within Google. A key to its scalability is self-provisioning—that is, the interface for an AdWords customer has been completely automated such that there is no manual involvement.

Most of these Interface processes are unique and proprietary to the organization that developed them, and as such comprise a unique type of intellectual property that can be of considerable market value. ExOs invest considerable attention to Interfaces and a great deal of human-centered design thinking is brought to bear on these processes in order to optimize every instantiation.

Ultimately, Interfaces tend to become the most distinctive internal characteristics of a fully realized ExO. There’s a good reason for this: at peak productivity, Interfaces empower the enterprise’s management of its SCALE external attributes—in particular Staff on Demand, Leveraged Assets and Community & Crowd. Without such interfaces the ExO cannot scale, thus making them increasingly mission-critical.

There has always been a tension in business created by the need to balance instrumentation and data collection versus running the company and getting things done. Collecting internal progress statistics takes time, effort and expensive IT. That’s why results were usually tracked annually or, at best, quarterly.

In High Output Management, Grove’s highly regarded manual, he introduced OKRs as the answer to two simple questions: Where do I want to go? (Objectives) How will I know I’m getting there? (Key Results to ensure progress is made)

Some characteristics of OKRs: KPIs are determined top-down, while OKRs are determined bottom-up. Objectives are the dream; Key Results are the success criteria (i.e., a way to measure incremental progress towards the objective). Objectives are qualitative and Key Results are quantitative. OKRs are not the same as employee evaluations. OKRs are about the company’s goals and how each employee contributes to those goals. Performance evaluations—which are entirely about evaluating how an employee performed in a given period—are independent of OKRs. Objectives are ambitious and should feel uncomfortable. [In general, up to five objectives and four key results per initiative are optimal, and key results should see an achievement rate of 60 to 70 percent; if they don’t, the bar has been set too low.]

Scientific results in neuroscience, gamification and behavioral economics have shown the importance of both specificity and frequent feedback in driving behavioral change and, ultimately, having an impact. Specificity and rapid feedback cycles energize, motivate and drive company morale and culture. As a result, a number of services, including OKR Hub, Cascade, Teamly and 7Geese, have been formed to help businesses track these measures.

The only difference between scalable learning and kaizen is the use of new and more advanced offline and online data-driven tools to test assumptions of customer groups, use cases and solutions.

By relying on quantitative and qualitative data, a company forms a conclusion based on a series of well-considered questions: Does a product fit the need of the customer? How did a customer solve a problem or need in the past? What are the current costs created by the customer problem? Should we adapt or change our course? Are we ready to scale?

As Eric Ries explains, “The modern rule of competition is whoever learns fastest, wins.”

Autonomy is a prerequisite for permissionless innovation.

From teleworking to outsourcing to flattened, virtual organizations, there has been a clear and steady trend toward increased autonomy in the workplace. As a result, we predict the lightweight OKR approach will gradually replace traditional top-down managerial oversight.

“We start from the presumption that our people are talented and want to contribute. We accept that, without meaning to, our company is stifling that talent in myriad unseen ways. Finally, we try to identify those impediments and try to fix them.”

One survey by McKinsey found that after experiencing poor customer experience, 89 percent of consumers switched their business to a competing company. On the flip side, 86 percent said they were willing to pay more for better customer experience.

“There are still hierarchies in a network, but the hierarchies tend to be competence-based hierarchies, relying more on peer accountability than on authority-based accountability—that is, accountability to someone who knows something, rather than to someone simply because they occupy a position, regardless of competence. It is a change in the role of the manager, not an abolition of the function.”

“Communication is the basis for civilization and will be a catalyst and platform in the future for more innovations in many industries.”

Priestley’s equation for social business is: CONNECTION + ENGAGEMENT + TRUST + TRANSPARENCY.

views social technology as having three key objectives: Reduce the distance between obtaining (and processing) information and decision-making. Migrate from having to look up information to having it flow through your perception. Leverage community to build out ideas.

From our perspective, Social Technologies are comprised of seven key elements: Social objects, Activity streams, Task management, File sharing, Telepresence, Virtual worlds and Emotional sensing.

“An Exponential Organization 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.”

The key question for any organization is not whether you “look” like an Exponential Organization, but “How exponential are you?” That is, how much have you internalized the philosophy of being an ExO? How does it inform your daily operations in terms of autonomy and social technology? How efficiently do you use the right tools, from dashboards to interfacing? And how open are you to risk, to experimentation and even to failure?

  1. Information Accelerates Everything

Network effects and customer experience lock-in seem to be at the root of this fundamental change in the nature of competition.

By this we mean that with the web, it is possible to promote an online product worldwide for a tiny fraction of what it cost just twenty-five years ago. And, in concert with a viral referral loop, customer acquisition costs can also be cut to what was once deemed impossible: zero. It is precisely this advantage that allowed businesses such as Craigslist, eBay and Amazon to scale with extraordinary speed to become some the world’s biggest companies.

What we’re now seeing with ExOs—and this is tremendously important—is that the marginal cost of supply goes to zero.

argue that as technology brings us a world of abundance, access will triumph over ownership. By comparison, scarcity of supply or resources tends to keep costs high and stimulates ownership over access.

Today, the outsider has all the advantages. With no legacy systems to worry about, as well as the ability to enjoy low overhead and take advantage of the democratization of information and—more important—technology, the newcomer can move quickly and with a minimum of expense. Thus, new actors and entrants are well equipped to attack almost any market, including yours—along with your company’s profit margins.

As Steve Forbes sees it, “You have to disrupt yourself or others will do it for you.” This applies to every market, geography and industry.

We see a consistent set of steps around disruptive innovation comprising the following: Domain (or technology) becomes information-enabled Costs drop exponentially and access is democratized Hobbyists come together to form an open source community New combinations of technologies and convergences are introduced New products and services appear that are orders of magnitude better and cheaper The status quo is disrupted (and the domain gets information-enabled)

(As an aside, consider that an MTP is a BHAG with purpose.)

In short, a five-year plan is a suicidal practice for an ExO. If it doesn’t send the company racing off in the wrong direction, it can present an inaccurate picture of what lies ahead, even in the right direction. The only solution is to establish a big vision (i.e., an MTP), set an ExO structure into place, implement a one-year plan (at most) and watch it all scale while course-correcting in real time.

Moments of Impact: How to Design Strategic Conversations That Accelerate Change,

Ertel and Solomon boil it down to five distinct phases for any team planning session or strategic decision: Define your purpose Engage Multiple Perspectives Frame the Issues Set the Scene Make it an Experience

Moments of Impact is an important guide for anyone interested in reducing the rash of mind-numbing, unproductive meetings and optimizing the time that management spends together.

Thus, the near future, certainly for ExOs, sees five-year plans being replaced with the following elements: MTPs for overall guidance and emotional enrollment. Dashboards to provide real time information on how a business is progressing. Leveraging “Moments of Impact” for clean, productive decision-making. A one-year (at most) operating plan that is connected to the Dashboard.

In an ExO world, purpose trumps strategy and execution overrides planning. Replacing five-year plans with these new, real time elements can be scary but it’s also liberating, and the rewards for those willing to stay on the ride will be both decisive and astonishing. Besides, being eaten alive by an upstart competitor is anything but relaxing.

As Peter Diamandis has often noted, one key advantage of a small team is that it can take on much bigger risks than a large one can. This can be seen clearly in the graph below—courtesy of Joi Ito, director of the MIT Media Lab—which shows how startups are characterized by high upside potential and low downside, while large organizations are characterized by just the opposite.

While this new paradigm is still in its early days, preliminary indications are that when successful, ExOs will build on the leverage created by their externalities and become platforms.

First computing, then tools and manufacturing. Today, that same rent-not-own philosophy even encompasses employees. Individual “temps” are nothing new, of course, but the concept now includes groups of temporary workers. Organizations can rent staff on demand from Gigwalk and other companies when a large amount of work needs to be done quickly, relieving them of the traditional, nightmarish practice of serial hiring and firing. In this instance, there is no distinction between “rented” staff and the ExO attribute, Staff on Demand.

Over the decades business owners have steadily moved from viewing business through the lens of a balance sheet to instead focusing on P&L—that is, emphasizing the primacy of profits over ownership.

Vision: What you’re doing Purpose: Why you do it Business model: What will fuel you as you’re doing it Wow and uniqueness factors: What sets you apart from others Values: What matters to you

ExOs are taking advantage of this accelerating trend in one of two ways: by creating new business models on existing data streams or by adding new data streams to old paradigms.

“A startup is a human institution designed to deliver a new product or service under conditions of extreme uncertainty.”

When assessing a startup for funding, investors typically categorize three major risk areas: Technology risk: Will it work? Market risk: Will people buy the product? Execution risk: Is the team able to function and pivot as needed?

“No business plan survives first contact with a customer.”

It takes more than seven years, on average, before a “liquidity event.” Inexperienced twenty-something founders are outliers. Companies with well-educated thirty-something co-founders who have history together tend to be most successful. The idea of a “big pivot” to a different product after startup is an outlier. Most Unicorns stick to their original vision (i.e., their founding MTP).

Step 1: Select an MTP (Massive Transformative Purpose).

Keep in mind, however, that an MTP is not a business decision. Finding your passion is a personal journey.

“Don’t just ask what the world needs. Ask what makes you come alive and go do it. What the world needs is people who have come alive.”

“The most successful people are obsessed with solving an important problem, something that matters to them. They remind me of a dog chasing a tennis ball. To increase your own chances of happiness and success, you must find your tennis ball—the thing that pulls you.”

Finding an MTP can be seen as a novel and perhaps more interesting way of asking yourself the following questions: What do I really care about? What am I meant to do?

Two more questions that can help speed the process of discovering your passion: What would I do if I could never fail? What would I do if I received a billion dollars today?

“Work is love made visible. The goal is not to live forever; the goal is to create something that will.”

Step 2: Join or Create Relevant MTP Communities

There is a fundamental DNA path dependency here. Are you primarily a community or are you primarily a company? The reason you have to ask yourself this is because sooner or later the two will come in conflict. We [DIY Drones] are primarily a community. Every day, we make decisions that disadvantage the company to bring advantage to the community.

According to Mullenweg, “Whenever this moment comes up, always bet on the community, because that’s the difference between long-term thinking and short-term thinking.”

Basically, if you get the community right, opportunities will arise. If you get community wrong, the engine of innovation dissolves and you won’t have a company anymore.

The following roles are critical if founding ExO teams are to deliver diverse backgrounds, independent thought and complementary skills: Visionary/Dreamer: The primary role in the company’s story. The founder with the strongest vision for the company comes up with the MTP and holds the organization to it. User Experience Design: Role focuses on users’ needs and ensures that every contact with users is as intuitive, simple and clear as possible. Programming/Engineering: Role responsible for bringing together the various technologies required to build the product or service. Finance/Business: The business function assesses the viability and profitability of the organization, is the cornerstone of interactions with investors and manages the all-important burn rate.

Discovery skills: The ability to generate ideas—to associate, question, observe, network and experiment. Delivery skills: The ability to execute ideas—to analyze, plan, implement, follow through and be detail-oriented.

“I would rather have somebody much less brilliant and who’s a team player, who’s straightforward, than somebody who is very brilliant and toxic to the organization.”

Remember, the three key success factors for an ExO idea are: First, a minimum 10x improvement over the status quo. Second, leveraging information to radically cut the cost of marginal supply (i.e., the cost to expand the supply side of the business should be minimal). Third, the idea should pass the “toothbrush test” originated by Larry Page: Does the idea solve a real customer problem or use case on a frequent basis? Is it something so useful that a user would go back to it several times a day?

We believe, however, that it’s better to start with a passion to solve a particular problem, rather than to start with an idea or a technology.

Those who really want something will find options. Those who just kind of want it will find reasons and excuses.

“Tell me something you believe is true but [that] you have a hard time trying to convince others [of].”

“The day before a major breakthrough, it is just a crazy idea.”

Step 5: Build a Business Model Canvas

Step 6: Find a Business Model

Christensen emphasized that it is not so much about disruptive products, but more about new business models threatening incumbents.

Kelly identified the following eight ways to build a business model when the underlying information is free: Immediacy: Immediacy is the reason people order in advance on Amazon or attend the theater on opening night. Being the first to know about or experience something has intrinsic cultural, social and even commercial value. In short: time confers privilege. Personalization: Having a product or service customized just for you not only gives added value in terms of quality of experience and ease-of-use or functionality, it also creates “stickiness,” as both parties are invested in the process. Interpretation: Even if the product or service is free, there is still considerable added value to any service that can help shorten the learning curve to using it—or using it better. Kelly often jokes: “Software: free; the manual: $10,000.” Authenticity: Added value comes from a guarantee that the product or service is real and safe—that it is, in Kelly’s words, “bug-free, reliable and warranted.” Accessibility: Ownership requires management and maintenance. In an era where we own hundreds of apps on several platforms, any service that helps us organize everything and improve our ability to find what we need quickly is of particular value. Embodiment: Digital information has no “body,” no physical form, until we give it one—high definition, 3D, a movie screen, a smartphone. We willingly pay more to have free software delivered to us in the physical format we prefer. Patronage: “It is my belief that audiences WANT to pay creators,” Kelly wrote. “Fans like to reward artists, musicians, authors and the like with tokens of their appreciation, because it allows them to connect. But they will only pay if it is very easy to do, the amount is reasonable, and they feel certain the money will directly benefit the creators.” He adds that another benefit of a simple payment process is that it capitalizes on users’ impulsiveness. Examples include iTunes songs and Spotify, as well as Netflix subscriptions. Customers choose to pay for each of these services even though the same content can be acquired through piracy. Findability: A creative work has no value unless its potential audience can find it. Such “findability” only exists at the aggregator level, as individual creators typically get lost in the noise. Thus, attaching yourself to effective channels and digital platforms like app stores, social media sites or online marketplaces where potential users can find you has considerable value to creators (and, ultimately, to users).

The model tracks the following layers and key metrics: Acquisition: How do users locate you? (Growth metric) Activation: Do users have a great first experience? (Value metric) Retention: Do users come back? (Value metric) Revenue: How do you make money? (Value metric) Referral: Do users tell others? (Growth metric)

The following is a guide to implementing ExO attributes into a startup: MTP: Formulate an MTP in a particular problem space, one that all founders feel passionate about. Staff on Demand: Use contractors, SoD platforms wherever possible; keep FTEs to a minimum. Community & Crowd: Validate idea in MTP communities. Get product feedback. Find co-founders, contractors and experts. Use crowdfunding and crowdsourcing to validate market demand and as a marketing technique. Algorithms: Identify data streams that can be automated and help with product development. Implement cloud-based and open source machine and deep learning to increase insights. Leveraged Assets: Do NOT acquire assets. Use cloud computing, TechShop for product development. Use incubators like Y Combinator and Techstars for office, funding, mentoring and peer input. Starbucks as office. Engagement: Design product with engagement in mind. Gather all user interactions. Gamify where possible. Create a digital reputational system of users and suppliers to build trust and community. Use incentive prizes to engage crowd and create buzz. Interfaces: Design custom processes for managing SCALE; do not automate until you’re ready to scale. Dashboards: Set up OKR and value, serendipity, and growth metrics dashboards; do not implement value metrics until product finalized (see Step 10). Experimentation: Establish culture of experimentation and constant iteration. Be willing to fail and pivot as needed. Autonomy: Implement lite version of Holacracy. Start with the General Company Circle as a first step; then move onto governance meetings. Implement the GitHub technical and organizational model with radical openness, transparency and permission. Social Technologies: Implement file sharing, cloud-based document management. Collaboration and activity streams both internally and within your community. Make a plan to test and implement telepresence, virtual worlds and emotional sensing.

The table below shows our assessment of leading ExOs and the attributes they’ve most leveraged, showing a good distribution and usage of both SCALE and IDEAS elements.

“Culture is what happens when the boss leaves.”

Establishing a corporate culture starts with learning how to effectively track, manage and reward performance. And that begins with designing the OKR system we outlined in Chapter Four, and then continues through the process of getting the team habituated to transparency, accountability, execution and high performance.

There are eight key questions to think about—not once, but repeatedly—as you build out your startup. Successfully answering each one gives you a passing grade in terms of this chapter: Who is your customer? Which customer problem are you solving? What is your solution and does it improve the status quo by at least 10x? How will you market the product or service? How are you selling the product or service? How do you turn customers into advocates using viral effects and Net Promoter Scores to drive down the marginal cost of demand? How will you scale your customer segment? How will you drive the marginal cost of supply towards zero? As mentioned earlier, that final question is the most critical for an ExO. To be…

As Ray Kurzweil says: “An invention needs to make sense in the world in which it is finished, not the…

When you develop a product with the near future in mind instead of the present, it greatly…

“It takes a 9x improvement to move people from incumbent products to new products from startups.” There is a certain threshold value, which is why we’ve set a minimum 10x…

Leading platform expert Sangeet Paul Choudary identified the four steps needed to build a successful platform (as opposed to a successful product): Identify a pain point or use case for a consumer. Identify a core value unit or social object in any interaction between a producer and consumer. This could be anything. Pictures, jokes, advice, reviews, information about sharing rooms, tools and car-rides are examples of things that have led to successful platforms. Remember that many people will be both producers and consumers, and use this to your advantage. Design a way to facilitate that interaction. Then see if you can build it as a small prototype that you can curate yourself. If it works at that level, it will be worth taking…

To implement platforms, ExOs follow four steps in terms of data and APIs: Gather: The algorithmic process starts with harnessing data, which is gathered via sensors, people, or imported from public datasets. Organize: The next step is to organize the data. This is known as ETL (extract, transform and load). Apply: Once the data is accessible, algorithms such as machine or deep learning extract insights, identify trends and tune new algorithms. These are realized via tools such as Hadoop and Pivotal, or even (open source) deep learning algorithms like DeepMind or Skymind. Expose: The final 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…

As Steve Jobs said, “We run Apple like a startup. We always let ideas win arguments, not hierarchies. Otherwise, your best employees won’t stay. Collaboration, discipline and trust are critical.”

Experience has shown that transforming an existing enterprise into an Exponential Organization requires two things. The first is a company culture that can quickly adapt to rapid, often radical, change.

Needless to say, imposing the ExO model on a more traditional company—one with a hardened culture or a rigid managerial hierarchy—is much more difficult.

That leads us to the second requirement for turning an established company into an exponential one: a visionary leader who has the full support of the board and senior management.

Information moved slowly and insights took a long time to be implemented. Reality, as with the game of “Telephone,” became distorted at each point of transfer. The flow pattern of the information inevitably bypassed a tremendous amount of intermediary brainpower and experience. The process often caused organizations to behave in a sociopathic manner, ultimately forcing employees to do things against their better judgment.

We can generalize the many issues facing large organizations to the following three: Most focus and attention is internal, not external. Emphasis tends to be on technologies with existing expertise; converging technologies or adjacencies tend to be ignored and breakthrough thinking is punished. Reliance on innovation from inside rather than outside.

“Companies may promote the idea of new business creation, [but] in the end they are all in the business of reducing risk and building to scale—which is, of course, the antithesis of entrepreneurship and new ventures.”

“If you are relying on innovation solely from within your company, you’re dead.”

Transform leadership. Partner with, invest in or acquire ExOs. Disrupt[X]. Implement ExO Lite internally.

Recommendation: Bring in outside sources to update your senior management and board on accelerating technologies.

Not surprisingly, smart CEOs are already setting up sessions geared toward helping board members come to grips with the new realities of an exponential world.

Recommendations: Educate the board so that it is equipped to buy into the CEO’s plan for radical change. In addition, track your board using OKRs.

“When I’m hiring employees today, imagination is much more important than experience.”

Recommendations: Break up bastions of old-line thinking and replace them with individuals and teams offering diversity in terms of experience and perspective. Remember that one of the most important aspects of diversity requires putting young people into positions of power and influence. In addition, include more women on your board.

Optimizers: Run large businesses at scale and squeeze efficiency to maximize profits. Scalers: Take a proven model and grow it. Evangelists: Champion new ideas and move projects from the idea stage to initial commercialization.

Recommendations: Keep diversity in mind when appointing to governance and advisory boards. Regularly take your senior leadership through a personal transformation program. Examine your own leadership skill sets. Remove anyone who puts his or her own career ahead of the success of the enterprise.

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 new model, as well as to gauge fit and synergy.

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 toward partnership or acquisition in the future.

Recommendation: Implement a program to identify, partner with, invest in or acquire the ExOs in your industry. Give it teeth.

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.

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