Customer Centricity

Exponential Organization: Transforming Your Business in the Information Age

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2020-11-30
Reading time: 8 minutes

Companies like Uber, Airbnb, or Netflix seemingly came out of nowhere and overtook their market competitors in just a few years, revolutionizing their entire industry in the process. They are faster, cheaper, and better. How did they succeed? Through an entirely new organizational model - the Exponential Organization.

The world we live in is constantly changing. New insights and ideas drive progress and developments that can often change all of our lives. Especially in the last decades, in the information age, new technologies – first and foremost the Internet – have caused profound changes in countless aspects of society.

This change does not stop at companies either. These developments hold the potential for enormous increases in performance and scalability.

This article will introduce you to the model of exponential organizations so that you too can take advantage of this potential. I will explain the difference between a traditional, classical organization as we know it and an exponential organization as Salim Ismail describes it. To do this, I will contrast the principles and characteristics of the two forms of organization in an illustrative way. Since there is not much literature on this subject, I will primarily refer to the book Exponential Organizations by Salim Ismail, but I will also include my own experiences that I have been able to gather so far.

Exponential organizations - at a glance

What is an exponential organization?

A bit more patience. Before we dive into the world of successful ExOs, let’s first take a look at the classic form of business, which operates according to linear laws. If you want to learn directly what ExOs are, then jump to your desired section.

The Classical Form of Organization - Linear Growth, a Brief Glimpse into History

For a long time, the productivity of a community was directly dependent on its equity. The following examples, which you surely know from your history lessons, illustrates this:

At the dawn of mankind, it was the hunter-gatherers who had as capital only themselves and their own labor. Soon man learned to tame farm animals and to let them work for him. Oxen and donkeys were eventually replaced by steam engines, which made industrial and mass production possible.

Each of these evolutionary steps moved mankind forward, creating greater productivity and prosperity. With each step, the efficiency of production increased many times over. One donkey managed the work of several people in the field, and a single spinning machine at the time of the Industrial Revolution took over the job of a multitude of needleworkers, and that at breathtaking speed.

But although productivity was multiplied with each stage of evolution, the basic principle remained linear.

If the number of donkeys or factories doubles, productivity also doubles.

The performance of a company therefore stands and falls with its material possessions in the form of means of production. Therefore, if a company wants to grow, capital investments and usually also time are necessary. Several years often pass before a new factory is planned, approved, built and put into operation.

Briefly, this means that classically organized companies often have to make very large investments, the results of which are only visible after a long time.

Especially in areas that are subject to constant change and development, this can be equivalent to a high-stakes gamble – a risk that you should be aware of. No one knows how your industry will evolve over the next few years. If your company directs its efforts in one direction and it turns out to be the wrong decision, it may be too late. The competition has done better in the meantime, or the whole industry has changed so much that the original business idea is obsolete. Including the capital spent on it. There are countless examples of this.

But what makes an ExO different? What distinguishes it and why is it so important nowadays?

Achieve exponential growth with information

Such lengthy and inflexible plans as I have described above can no longer be afforded by any company today. Due to the far-reaching use of information technology, developments are much faster today.

Gordon Moore established the postulate named after him, “Moore’s Law”, according to which the computing power of transistors and thus also microprocessors doubles approximately every 2 years, i.e. grows exponentially. Although this “law” is only a prediction and not a law of nature, it has by and large proven true in recent decades. The futurologist Ray Kurzweil has taken a closer look at this development and gained important insights that are also elementary for the principle of ExOs:

The pattern of doubling does not only apply to the computing power of microchips, but can be observed in all information technologies. He called this the “Law of Accelerating Returns.”
This phenomenon is kept going by information. If an area, such as a technology or entire industry, is based on and controlled by information, then a doubling of performance can be observed there on a regular basis.
Many major technologies are now based on information and follow the pattern. These include robotics, biotechnology, neuroscience and artificial intelligence, as well as some areas in the field of energy production.

Using an example from biotechnology, I want to show you how these findings can also bring about disruptive changes in areas other than IT. The Human Genome Project was founded in 1990 with the goal of decoding a human genome. Estimates predicted the project would take 15 years. In 1997, halfway through, only one percent of the genome had been decoded. Experts declared the project a failure and advised that it be discontinued.

After all, if one percent had taken seven years, decoding the entire genome would take a long time. Kurzweil also commented on the problem, but did not see the project as a failure at all. He realized that the speed of decoding was increasing exponentially, and he was right. As early as 2001, even earlier than originally estimated, the decoding was completed. In the meantime, entire human DNA profiles can be decoded for less than $1,000, a fraction of the cost at the time.

"If all you rely on is innovation that comes from within your own company, then you can't survive."
Peter Diamandis Tweet

Ok. So what is an exponential organization?

To meet the developments and insights described above, modern companies need to rethink. The author and entrepreneur Salim Ismail has studied modern companies and, together with his team, has examined which common principles can be found in successful and fast-growing companies. Using this valuable data, they developed the Exponential Organizations model, which they describe in detail in the book Exponential Organizations.

The book includes the following definition:

"An Exponential Organization (ExO) is one whose impact (or return) is disproportionately high - at least ten times higher - than comparable organizations. The reason for this is the application of new organizational methods that use accelerating technologies."

The book also sums up the basic principle by which the ExOs work:

"Instead of working with many people or building large factories, Exponential Organizations are based on information technologies that take what was once material in nature and bring it into the digital world where it is then always available."

According to the standard work, you can identify an (emerging) ExO by at least a tenfold increase in output over a period of 4 to 5 years.

Ismail and his colleagues have identified a number of characteristics that make up an ExO. Using these, you can easily understand the aspects and strategies of ExOs and compare them piece by piece with your own business philosophy and strategy.

The first of these characteristics is the MTP (Massive Transformative Purpose), which provides a certain framework.

The Massive Transformative Purpose (MTP) - Why you should aim high

You’ve probably heard the slogan “The sky is the limit” . What sounds overambitious at first glance can actually be a driving factor for a successful company.

ExOs need to set high goals. Those who think small usually don’t pursue a strategy that fosters rapid growth. If the scale of one’s business eventually overtakes the business model, a company can lose its bearings and no longer know in which direction to move.

To prevent this problem, successful exponential organizations have high-level goals called “Massive Transformative Purpose.” Examples of such MTPs include

Ideas worth spreading – TED
Accelerate the world’s transition to sustainable energy – Tesla
Make innovation accesible – Quirky

An MTP is the overarching and purposeful meaning behind an organization. A Massive Transformative Purpose is not:

A simple corporate mission statement (not only, anyway)
Representative of what is currently possible
Strongly focused
Oriented only to profit
Only one major goal – it must also be purpose-driven to create a transforming impact

An MTP can also give you a competitive edge. Companies that open new branches (so-called first movers) can differentiate themselves from the competition with a comprehensive MTP. For example, if the MTP is “Make information available to all,” a competitor can only fall short, because a statement like “Make information available to all but better” is unimaginative.

Having a good MTP also helps you be attractive to new talent and other organizations such as affiliates or NGOs (see Community and Crowd; below). The MTP saves effort and cost to get and keep these potential partners on board. Last But Not Least, an MTP also has the advantage of acting as a stabilizing element during periods of haphazard growth, which is very important for exponentially scaling organizations.

More characteristics: SCALE & IDEAS

Besides the MTP, there are ten other characteristics that you can find in Exponential Organizations. Not every ExO has all of the characteristics, but the more are present, the more scalable it is. According to Ismail and his team’s research, a company should have at least four of these characteristics implemented to be called an Exponential Organization.

The characteristics are divided into SCALE and IDEAS.

SCALE - this area provides for growth, creativity and uncertainty

Staff on Demand – use non-core staff for as many tasks as possible, rather than employing many full-time employees.
Community & Crowd – an enthusiastic community gives your company support, can provide creative input, enable funding or take over certain tasks.
Algorithms – information, i.e. data, is essential for exponential growth and the fulfillment of various tasks. Algorithms form the basis for interacting with this data and making it useful for people, including you and your customers.
Leveraged Assets – As many of the assets needed to run your business as possible should be borrowed or shared rather than owned by your company. You should outsource tasks whenever possible. Some examples of this are:
- Google uses data from its users’ smartphones to collect information about the traffic situation. Google does not own the smartphones itself and does not pay the users anything for access to their data, which ensures relatively low costs.
- Uber and BlaBlaCar use their users’ vehicles, thus eliminating the cost factor of having their own fleet.
- Services such as Amazon Web Services (AWS) offer computing capacity and storage that can be easily scaled as needed. By using such services, companies have no need to operate their own expensive data centers. Instead, this task is outsourced and only paid for actual usage, which ensures high flexibility.
Engagement information also helps you grow your own community and create positive feedback loops. The loyalty of your users is strengthened and innovative ideas are collected from the community. All of this helps your Exponential Organization grow.

IDEAS - this area provides order, control and stability

Interfaces – using automated workflows, they forward the outputs from SCALE to the right people and places in your company or to the users at the right time.
Dashboards – they present the collected data clearly for you and your team to facilitate the overview and analysis of the data.
Experimentation – Continuous development is achieved through experimentation. This means making assumptions and testing them (with controlled risks), as described in the Lean Startup methodology.
Autonomy – Work in your organization takes place in interdisciplinary and self-organized teams. Authority is decentralized, for example by allowing your employees to decide for themselves which projects they will work on. Autonomy is a fundamental prerequisite for “approval-free innovation”.
Social technologies – interactions and decision-making are simplified and made more immediate through digital technologies.

How Exponential Organization Principles Can Help You Grow

Many of the principles that have made ExOs successful can be applied to already established companies. We have compiled the most important tips for you. You can use them to steer your company in the direction of exponential growth.

Include as many already used assets as possible – Whether web hosting or analytics software – there are already solutions for most of the things your company needs. Using them is much cheaper and more flexible than providing everything yourself.
Avoid too much permanent staff – Not every task requires a full-time employee. By using staff on demand as often as possible, you stay flexible.
Give your staff more responsibility – By letting your staff choose the projects they want to work on, authority is decentralized. This is the approach taken by GitHub, for example, which is a very good example of a successful ExO.
Listen to your employees – Every one of your employees, regardless of position, should be able to make suggestions and ideas that are also seriously heard and considered. In this way, previously unnoticed potential can be identified in a wide variety of places and meaningful improvements and innovations can be made. If an employee approaches you with an idea, you should only reject it if you can justify why it does not make sense. Not the other way around.
Provide your employees with as much information as possible – Giving everyone access to as much information as possible makes it easier to move between projects and train new employees. A wiki system, such as Confluence, can help you collect and organize your company’s information and make it available.
Don’t be afraid of newcomers – Even though employing people with professional experience has some undeniable advantages, you shouldn’t be afraid of hiring newcomers or career changers. They often have an unbiased view of things and have not yet internalized entrenched routines that can sometimes hinder innovation. When recruiting newcomers and career changers, you should place more emphasis on motivation and attitude than on relevant experience. Those who bring enthusiasm and a “self-starter mentality” are usually an asset to your company.
Take advantage of new technologies – Keep up to date with how new technologies are developing and how they can potentially help you in your business.
Experiment – Try out new ideas. Don’t be afraid to test new things. Prototypes and user tests can help you do this.An iterative approach (step-by-step improvement) and short feedback loops are important. This way you keep the risk low and remain user-centered.

Note: When reorienting existing companies, it should be noted that each case differs in terms of the initial conditions. This is why there is no “patent remedy”, but rather an approach must be chosen that fits the circumstances.

Conclusion

If your company’s business is based on information, it has the potential to grow exponentially. The philosophy of Exponential Organizations helps you to better understand and tap into this potential. The key points here are the Massive Transformative (MTP), which provides a framework and direction, and the use of shared assets.

You are in the process of realigning or restructuring your company or even critically questioning your business model? Then feel free to contact us via the contact form or connect with André & Manuel on LinkedIn.