Book review: Exponential organizations

ExOExponential Organizations ExO achieve creative destruction using disruptive technology. This book gives an insight in how to become an ExO. 

In the book Exponential Organizations IsmailMalonevan Geest and Diamandis discuss the phenomenon of exponentially growing markets and the companies that drive the market. An exponential development means a 100 percent increase at regular intervals. An example mentioned in the book is the mobile market. The number of sold telephones doubled between 2002 and 2004. The same thing happened between 2004 and 2006. And again from 2006 to 2008.

Many operators have the bad habit of (not?) understanding the consequences of exponential growth, which is one of the points made by the author. They try to show with successive examples what happens and demonstrate how exponential growth is underestimated. In the year 2002, various analysts such as Garner Group and McKinsey assessed that the mobile market would increase by approximately 35 percent, showing linear growth. However, the increase was 100 percent. After this miscalculation, the forecast was cut significantly for the coming two years, and thus miscalculated again.

The same thing was repeated in 2006, and then they agreed to an even lower forecast than before. After failing three times in a row they again made a linear growth forecast of 25-30 percent over the coming two years. And they were wrong again, the market doubled.

 The human Genome Prject

Another example showing exponential growth is the Human Genome Project. It started in 1990 in order to map the complete human genome. The budget was $3 billion, and the estimated time 15 years.

Halfway through the project, one percent of the human genome had been mapped. External experts spoke about fiasco and that it would take 700 years to finish. The team said that they now where halfway. What they knew, but everyone else missed, was that they doubled the amount of mapped genome every year. One percent doubled seven times equals 100 percent. The project was completed in 2001, prior to the time plan and on a smaller budget. The so-called experts failed the end date with 696 years.

An example not mentioned by the authors, but still actual is the growth of wind energy in Sweden. In 2002, approximately 0,5 TWh was produced. Three years later, the production was doubled to 1 TWh. In 2007 it was doubled again to two, in 2010, 4 were achieved and in 2013, 8 TWh were reached. Now, everything indicates that 16 TWh will be reached during 2016. But after this, the forecasters estimate that the development will become linear. Why is that?

Wind energy is a typical example of a product that through long series shows decreasing prices and increased performance on a rapidly growing market. The improvement effects become exponential. At present, the production of nuclear energy has reached 64 TWh, a level to be reached by wind energy in 2021 at the current speed.

The nuclear power plants and other types of energy produced as one-piece products do not have the possibility to meet the competition from long series, where the development cost can be divided into many units. The energy companies in Europe have entirely miscalculated the development rate and are now losing enormous amounts of money.

Motorola and the mobile market

Vattenfall and other energy companies are not the only ones to not keep up the development pace. At the end of the 1980s, Motorola estimated that the mobile market was the future. It was entirely correct, but then there was an error.

In the 1980s the costs for pylons were very high. And the telephones were bulky. Therefore, Motorola came up with the idea that a net of satellites would be better. They launched and implemented the Iridium project. This was a fiasco. The costs of the pylons fell sharply and at the same time mobiles became increasingly smaller. Motorola’s mistake was to believe that development is linear and not exponential. Motorola had also locked the business plan for 12 years before the system was taken into operation.

According to the authors, when something grows exponentially, it is about disruptive technology. Or as Schumpeter called it, creative destruction. The number of sectors exposed to creative destruction will increase since information systems create new conditions, argue the authors.

Uber changes the taxi market through an app and an entirely new way to solve the transportation problem, Airbnb changes the arena for the hotel market in a similar way. These are examples of companies growing more than ten times faster than the traditional companies in the sector. These companies are therefore called exponential organizations, ExO.

The book’s second and main aim is devoted to describing what it is that makes a company an ExO and how to become one. The authors emphasize that today’s line and matrix organizations were developed in order to create stability in a linear world. In order to achieve exponential growth, organizations able to create instability and creative destruction are required. Even if it is the organization’s own activity to be attacked.

The authors describe how today’s organizations, on the contrary, are attacking everything that are menacing the current business model and products. They call this the organization’s immune system. In the example I mentioned about the energy companies, Eon tried to solve the problem of the immune system by dividing the company in two: Eon and Uniper.

While Uniper receives all old types of energy, Eon will develop new solutions which, in the long run, will be ousting Uniper. More dynamic companies, such as Amazon have the capacity to develop new solutions cannibalizing on the old activity. For example, Amazon has Kindle, which is hitting against its own book trade. So how is this done?

Some examples

If you want all the tips you are recommended to buy the book (available as an e-book on, for instance, Google Play). I will show you some examples. The main subject is to reach the organizational structure. To have steep drainpipe-like development organizations is not a success factor, according to the authors.

The development work needs to take place in networks with shifting participants, and in different locations. A part of the development work should possibly take place openly in different communities. One must dare to experiment and to have short development cycles with an (what I call) agile approach. The work teams will be self-organized and multidisciplinary with decentralized authorities. Where the information arises, the decisions will be made. One will not need to search for information, it will flow to you.

The above pieces of advice, as well as many others, are good. But if you start out with Puls, important things are missing, I think. How do you build an organization that is as agile as the authors request? The same thing regards how to lead a dynamic and changing company. A management with focus and ability to handle the difficulties that inevitably will appear is required to achieve a massive transformation.

Many of the arguments in the book, as I have illustrated above, are remembered from the research results of the past 50 years. Different researchers, through their results, have repeatedly recommended agile (organic) organizations. Industrial leaders have refused to listen and instead created linear bureaucracies.

The result is as Phelps and Sjöö have shown, permanently sinking innovations. The message from Exponential Organizations is, however, that disruptive technology is actually arriving on a broad front. In that case, the market changes very quickly and very dramatically.

The book Exponential Organizations is worth reading and it is full with advice. In particular, it is good for companies with Puls, since an agile platform is in place to which apply the advice.

The image is processed using material from Bruno Gilli / ESO CC BY 4.0 and Staffan Engström CC BY-SA 4.0 from Wikipedia.

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