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ExO Business Model Overview

UPG Team February 15, 2023

The module is made up of two components, first the Linear Organization, the second video an overview of the exponential organization business model. Both videos are hosted next to each other.

which have been the basis of organizational structures for centuries, hinder companies from adapting to the demands of the exponential world. While ownership and the accumulation of value through people and resources were once key components of success, automation, mass production, and virtualization have challenged this way of thinking. Despite this, many companies still rely on linear product development methods, such as the New Product Development process, which further reinforces resistance to disruption and risk-taking, leading to inertia and lack of adaptability. As a result, these linear organizations tend to be sequential, hierarchical, risk-averse, and focused on short-term financial outcomes, which are ill-suited for adapting to the exponential world. In order to thrive in this new environment, organizations need to embrace non-linear thinking and operations that allow for more flexibility and adaptability. This may involve a shift away from traditional ownership structures and towards more collaborative and decentralized models, as well as a greater willingness to experiment and take risks in pursuit of long-term success. By embracing change and embracing a more agile mindset, organizations can position themselves for success in the rapidly changing business landscape of the 21st century.

The issues that arise from organizing a company in a matrix structure. The vertical and horizontal divisions of the matrix often lead to silos of information and a lack of cross-functional teamwork. This structure is good for command and control but terrible for accountability, speed, and risk tolerance. The power balance tends to favour the horizontal functions like HR and legal, leading to a default “no” response. Additionally, the bureaucratic process often stifles innovation and drives away ambitious employees.

The challenges of achieving economies of scale and increased profitability while maintaining flexibility. The pressure to cut costs and increase revenue has led to offshoring, international expansion, and mega-mergers, but the flip side of increased size is decreased flexibility. Large organizations find it difficult to implement and maintain disruptive changes like those seen during the pandemic, and their linear structures clash with the newfound freedom and flexibility of their employees.

The problem is the corporate immune systems and their impact on organizational change and innovation. The mother company initiates an auto-immune response to any potentially disruptive shift, which can take the form of passive-aggressive blocking or direct career-ending attacks. This immune response renders big organizations vulnerable to disruption. Abandoning linear thinking and embracing the Exponential World is key. Traditional linear structures simply cannot compete in today’s landscape, and companies must adapt to survive.

Here’s where we look at the speed of Exponential Organizations (ExOs) and how it differentiates them from traditional linear corporations. ExOs are characterized by their blindingly fast pace, which is getting faster every year. The emergence of young unicorn companies, valued at over $1 billion, in recent years exemplifies this rapid growth. These companies achieve historically unprecedented rates of productivity per employee by contracting out or crowd-sourcing slow-moving processes. The text notes that the most successful companies are born as ExOs and run by a charismatic founder who can dictate speed and direction. However, driving innovation and charting a compelling course requires many things, including respect by employees, technical credibility, and ultimately, the backing of the board and owners of the company.

In today’s rapidly changing business world, companies that fail to adapt to exponential technologies and changing market conditions risk becoming obsolete. The story of Nokia’s failed acquisition of Navteq and the subsequent rise of Waze illustrates the importance of embracing non-linear thinking and digitization to remain competitive.

Nokia’s decision to acquire Navteq was seen as a smart move at the time, as it gave them ownership over physical traffic sensors embedded in roads across Europe. However, the rise of Waze, which used crowdsourced data from users’ mobile phones to gather traffic information, ultimately proved more successful. Waze was able to scale quickly and cheaply by digitizing and dematerializing Navteq’s assets, and its success highlights the power of exponential organizations and non-linear thinking.

The business world is currently undergoing a period of rapid change, driven by exponential technologies and shifting market conditions. Companies that fail to adapt to these changes risk becoming extinct, like the dinosaurs that were unable to adapt to an asteroid impact 65 million years ago. To survive and thrive in this new world, companies must embrace non-linear thinking, digitize their assets, and scale their organizations to take advantage of new opportunities.

To remain competitive in a rapidly changing business world impacted by exponential technologies, companies must embrace non-linear thinking, digitization, and scaling while being open to new opportunities for growth and success, or risk becoming obsolete.

Exponential Organizations Overview

An Exponential Organization (ExO) has transformed the business world. Catapulted by two key events in the tech industry that led to the birth of the ExO: the launch of the Apple iPhone in 2007 and Amazon Web Services (AWS) in 2006. These events drastically reduced the cost of starting a new business, leading to a surge in new organizational forms.

So how does an ExO differ from traditional organizations. The original definition of an ExO, published in 2014, described it as an organization whose impact is at least 10 times larger than its peers due to the use of new organizational techniques and accelerating technologies. However, the definition has been updated to reflect the fact that multiple companies can operate as ExOs and that the fundamental economic driver is the ability to radically drop the marginal cost of supply. As a reminder, ExOs achieve their impact by digitizing, dematerializing, democratizing, and demonetizing their products and services. This enables a massive drop in the marginal cost of supply, which in turn leads to a 10x improvement over non-ExO peers. ExOs are purpose-driven, agile, and scalable organizations that leverage accelerating technologies to deliver disproportionately positive outcomes.

Exponential Organizations (ExOs) are a new type of organization that leverages new technologies, business models, and organizational techniques to achieve extraordinary levels of growth and impact. These organizations are characterized by their ability to scale at an unprecedented pace, while maintaining an agile and adaptable structure that allows them to quickly respond to changing market conditions.
The key to the success of ExOs lies in their ability to harness the power of technology and innovation to drive growth and create value. They do this by leveraging five key outward-facing attributes, which are encapsulated by the acronym SCALE:

Staff on Demand: ExOs are able to quickly and easily scale their operations by leveraging external workers on an as-needed basis, rather than hiring internal employees. This allows them to rapidly increase capacity and reduce costs as needed, while maintaining a lean and agile organizational structure.

Community and Crowd: ExOs are able to tap into the collective intelligence and creativity of like-minded communities and crowds, who can contribute to everything from idea generation to product design and testing. This not only helps to drive innovation, but also provides valuable validation and feedback for new products and services.

Algorithms and AI: ExOs are able to leverage advanced machine learning and artificial intelligence technologies to gain new insights and drive growth. This allows them to quickly analyze vast amounts of data and identify trends and patterns that might be invisible to traditional organizations.

Leveraged Assets: ExOs are able to access, share, rent, or outsource assets to remain nimble and reduce capital expenditures. This allows them to maintain a lean and agile structure, while still having access to the resources they need to grow and scale.

Engagement: ExOs are able to leverage outside interest through gamification, digital reputation systems, incentive programs, and crypto economics to create network effects and positive feedback loops. This helps to drive engagement, loyalty, and retention among customers, employees, and other stakeholders.
In addition to these outward-facing attributes, ExOs also exhibit five internally facing attributes, which are encapsulated by the acronym IDEAS:

Interfaces: ExOs are able to interact with and automate the SCALE attributes in a way that allows them to do the right work at the right time. This helps to ensure that resources are allocated efficiently and effectively.

Dashboards: ExOs use real-time information and essential company and employee metrics based on OKRs to help everyone in the organization stay on track and make data-driven decisions. This allows them to quickly identify areas that need improvement and make changes as needed.

Experimentation: ExOs are able to introduce lean start-up methodology in all departments of the organization, with new ideas and processes, culturally enabling rapid, validated learning. This allows them to quickly test new ideas and iterate on existing processes to continuously improve and optimize their operations.

Autonomy: ExOs operate with a flat organizational structure that allows individual employees or multidisciplinary teams to operate independently and effectively. This empowers employees to take ownership of their work and drive innovation from the ground up.

Social Technologies: ExOs leverage peer-to-peer collaborative tools to facilitate transparent, real-time conversations across the organization. This helps to break down silos and encourage cross-functional collaboration, which is essential for driving innovation and growth.
Beyond these key attributes, ExOs also exhibit certain unique characteristics that set them apart from traditional organizations:

Environment: ExOs are committed to being good stewards of the environment and to contributing positively to the planet’s health. This means that they take steps to reduce negative environmental impacts (such as CO2 emissions and plastic waste) while also creating positive impacts through their products and services. Sustainable Development Goals: ExOs establish challenging but realizable goals to guide their development and keep them on track toward achieving their Massive Transformative Purpose. These goals are often aligned with the United Nations’ Sustainable Development Goals (SDGs), which aim to address global challenges such as poverty, inequality, and climate change.

Ethics: ExOs develop and adhere to a globally valid code of ethical conduct that guides all of their operations. This code is ratified unanimously by all stakeholders and is designed to ensure that the organization acts in a responsible and ethical manner throughout its lifespan.

People: ExOs prioritize employee and customer satisfaction, loyalty, and retention. They create a rewarding work environment that fosters a sense of shared purpose and career development for employees. In turn, this leads to greater customer satisfaction and loyalty, as customers are drawn to organizations that treat their employees well.

Productivity: ExO employees are able to achieve levels of productivity that are orders of magnitude higher than those of their linear competitors. This is due to the multiplier effect of technology, which allows employees to achieve more with fewer resources.

Near-zero marginal costs: ExOs are able to drive down the cost of manufacturing, marketing, and selling their products and services to near-zero levels. This is due to a combination of factors, including new technologies, innovative organizational models, social networks, and crowdsourcing.
Income: ExOs are able to achieve fast and consistent growth in both revenues and profits due to their ability to leverage Community and Leveraged Assets to scale their operations rapidly.

Intangible assets: ExOs are able to create measurable improvements in social, environmental, and societal capital through their rapid growth in intellectual (rather than physical) capital. This intellectual capital includes knowledge, expertise, and networks that can be leveraged to create new products and services, solve complex problems, and drive innovation.

In summary, Exponential Organizations are defined by their Massive Transformative Purpose, which sets a long-term goal for the organization that is both sweeping and profound. They also exhibit a set of ten key attributes that power their growth and success, including Staff on Demand, Community and Crowd, Algorithms and AI, Leveraged Assets, and Engagement. Additionally, they exhibit a set of unique characteristics that set them apart from traditional organizations, including a commitment to the environment, adherence to a code of ethical conduct, prioritization of people and productivity, near-zero marginal costs, and the creation of intangible assets. Together, these attributes and characteristics allow Exponential Organizations to achieve rapid growth, consistently high levels of revenue and profit, and measurable improvements in social, environmental, and societal capital.

The performance of ExOs has been impressive. In 2014, the top 100 ExOs globally were scored based on their usage of the ExO model. The top 10 ExOs saw an average increase in market capitalization of 6.4x over 8 years or 640%, outperforming the S&P companies’ average growth of 1.4x over the same time period. This demonstrates that the top 10 ExOs outperformed the S&P by about four times and is consistent with the top 10 most ExO-friendly companies of the Fortune 100.

The conclusion of this module highlights that ExOs are rare organizations that have reinvented traditional organizational structures to create organizations of distributed intelligence and power. These companies have been located all around the world and across multiple industries, and despite not aiming for performance, they outperform the competition every time. The potential to learn from ExO theory and implement its tools is open to every reader, regardless of the size or age of their enterprise. The module provides key resources and links for those interested in learning more about ExOs, including organizing and running an Awake Session, learning about a Sprint, the Fortune 100 list, and the ExO database.