Book review: Exponential Organisations

Last week I was speaking to one of our Investment Clients on what they wish to invest in tech wise and they said simply, “find us companies that fit the criteria from the book Exponential Organisations – why new organisations are ten times better, faster, and cheaper than yours”? So I decided I’d better read it!

A summary of Exponential Organisations – The Book

The basic is premise is that a new era has arrived – the era where “Information is the new currency”. In this era any business which does not take into account trends in big data, asset light business models taking advantage of unused capacity and who do not try and disrupt themselves after they have matured will not be safe. Who could have foreseen that Uber would dominate the taxi sector in a matter of months or that AirBNB would take such a hold in the accommodation sector, or that Spotify and Apple decimate the music sales sector and that telecom giants are in danger of becoming mere commodity? Any product which can be integrated into a smart phone will – maps, music, TV cameras, guitar tuners and metronomes (my latest apps!) and more.

Whereas before, a firm would spend months and maybe years designing a product and then build in a typical waterfall software development system (Requirements -> Design -> Build -> Test -> Maintenance) now we have MVP (Minimum Viable Product), Agile development - meaning products get to market much faster and iterate more quickly to the end result. With excess capacity in the production area (I.E., foundries for semi-conductors) and the cheap production hub which is China – huge capex is not needed to form new products. Production sites, which utilise Techshop and software services such as AWS/ Github, mean firms do not need to invest in overheads like before and can share resource.

In previous models, firms achieved linear growth – a % on the previous year - now exponential growth is possible – the doubling pattern present in Moore’s Law is now working with companies enabled by information.  Doubling anything means it gets bigger extremely quickly once it passes a critical mass.

The sharing economy is upon us and releasing under-utilised assets is key – leveraging assets not owning them. (E.G., Airbnb, Uber.)

Rule 1: Firms need an MTP  - Massive Transformative Purpose – (I.E., Google's “Organise the world’s information”)

Then they need to use:

• Staff on demand – more contractors than full-time internal staff to enable more skills and ramping up and down as needed.
• Communities and Crowd  - Leverage your community to improve the product (I.E., The Dropbox help function is essentially current users giving advice to each other and feeling smart about themselves while Dropbox don’t need a proper customer service.)
• Algorithms – use Big data to get more insight than humans can. Machine learning to try learn what customers want – before they know themselves!
• Leveraged assets – don’t need to necessarily own capex heavy assets – can timeshare on assets where there is capacity – Uber, Techshop for machining products. AWS for SAAS.
• Engagement – (I.E., using gamification to increase loyalty)

Inside the firm – the typical hierarchical structures do not work. Communication within the organisation is more important to be able to react to the market more quickly –Tools such as Yammer –  information is sourced and used in the same place as opposed to travelling all the way to the top for decision making. We will look at Holacracy in detail in a future blog. We will also take a look at OKR (Objective and Key Results methodology) for start-ups versus typical KPI measuring.

My favourite example of marginal cost and leveraging assets:

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Hilton hotels vs. Airbnb:  This is one of my favourite examples. For AirBnb to add 100 rooms, the marginal cost is essentially zero (100 new people go on the site and add their apartments) – whereas for Hilton Hotels to build a 100 room hotel costs £XXXXXX. What a difference?!?!! And all information technology enabled – matching underutilised assets to demand. Hence value created per employee in Airbnb is >10x more than an employee in Hilton hotels. The same ratios works for ROI (however don’t be fooled – that’s ROI on invested capital  - not returns if you buy a share – Hilton may offer better value depending on valuation).

Overarching theme: Corporations that do not try to disrupt themselves will be disrupted by smaller, more agile, more innovative start-ups. A firm that has disrupted itself successfully is Apple  (iPhone replaces iPod). 

My critique:  Some businesses need to be asset heavy and require long term investment – everyone cannot share resource if someone does not take a long view and build the capacity (I.E., aluminum smelters) – taking a long-term bet of huge capex on old fashioned supply/ demand and energy prices. So old fashioned business has not gone away.

So Exponential Organisations – worth having a read. Some stuff is pretty obvious however there are some nice ideas in there that they flesh out. The link from Moore’s Law to organisation growth in general is tenuous - until you look at Airbnb and Uber. 

We can’t all invent and run Exponential Organisations – I still appreciate small businesses owners who make a decent living in their own community. 

By John Rowland, Managing Partner

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