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Chances are you have already heard the term exponential organization. It was introduced in 2014 by Salim Ismail, Michael S. Malone and Yuri van Geest in their book ‚Exponential Organizations: Why new organizations are ten times better, faster, and cheaper than yours (and what to do about it)‘.

As the title suggest this new breed of companies is supposedly ten times as efficient as their ‚linear‘ counterparts by employing methods as externalization of key resources and by relying on new technologies and social networks. For a quick refresh of the concept, below is a video of Salim`s very insightful talk from last year`s Exponential Finance:

Summarized successful exponential organizations owe their abnormal performance to two key factors:

  • great reduction of the cost of drawing demand (in many cases to near 0)

  • even great reduction of the marginal cost of supply.

The way to achieve those results will obviously vary from company to company, but based on the authors research key factors are among others: externalization of resources (staff on demand, leased assets) , strong community engagement, application of technology and innovation. Indeed the most prominent exponential organization AirBnB does not own any hotels, but is present in nearly every country and would be the biggest hotel chain in the world, if it were one. The thesis is further supported by statistics on how fast new successful companies manage to achieve record valuations:

The chart suggests innovation cycles are rapidly shortening leading to very rapid declines of the marginal supply costs using technology in areas, where it was previously not applied (or the startup valuation model is completely wrong, which option will be the topic of another post).

The concept does look like the classical startup business model (Lean Startup Methodology), which is however not exclusively applied by startups. Many large established "linear" companies have been actually employing some of the aspects for years with just a few examples being GE with the entrepreneurial framework or the now well known innovation model by LEGO.

All of this might sound self explanatory at first, but if one thinks about the dominant companies from just 20 years ago, it will be apparent that these were mostly large vertically integrated corporations seeking to control as much of the 'scarce' resources as possible (i.e Samsung) - a business model not very different from the one applied by the very first private corporations like the East India Trading Company centuries ago. I can myself remember sitting in a big aula not too many years ago listening to lecture on how the optimal size of a universal bank is infinite driven by the powers of diversification and economies of scale, a theory likely to be proven very wrong soon.

On the contrary the new exponential organizations do not seek to control scarce resources, but rather thrive by the utilization of plentiful ones for novel purposes. This constitutes one of the biggest differences between the innovation model of the unicorns of today and the likes of Microsoft or Google from 20 or 10 years ago. One can argue that the new unicorns (led by Uber and AirBnB) destroy more value to the incumbents in the respective industry than they extract themselves leading to a net value transfer to consumers. Whether this is a good thing is a debate as old as modern economic theory coming back to the argument, whether supply or demand is the original source of economic growth. Regardless of the side taken innovation in recent years seems to be linked to disruption in an existing industry.

Coming back to the characteristics of an ExO and the way to identify them. Salim Ismail, Michael S. Malone and Yuri van Geest have applied their methodology and derived a list of the top 100 ExOs. The list does contain a lot of expected names, but also some unexpected ones like Chinese hardware manufacturer Xiaomi. It is true that a lot of the ExOs success is based on huge investments done by others before them (i.e. Uber`s rise would have not been possible, if everybody didn`t have a smartphone in his pocket). While an individual investor or a single company cannot make such investments, they can most definitely benefit from the capital already invested by others. Advancements in robotics and drone technology or deep learning algorithms can be utilized by others in ways their original inventors could not have imagined. This is also the reason why emerging ExO are subject of the interest of an increasing number of investors and will be a recurring topic on the ExponentialTechBlog.

#ExO #Startups

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