How-Successful-Companies-Can-Excel-at-Disruptive-Innovation
05 28 19

ExO Basics, Disruption

How Successful Companies Can Excel at Disruptive Innovation

Written By

Mike Lingle

8 min read

Read case studies of how already-successful organizations leveraged Salim Ismail’s ExO Framework to create disruptive innovation and exponential growth.

How-Successful-Companies-Can-Excel-at-Disruptive-Innovation

As Chief Growth Officer at ExO Works, my primary role is to help successful companies excel at disruptive innovation. This involves driving 10x improvements in efficiency into the core, which is not easy.

Most companies are satisfied with 10% incremental improvements. Long-term success also means experimenting with disruptive business models at the edge, often aimed at adjacent markets. I’m able to help our global 5000 clients by using the skills I learned developing software, building companies, and running accelerator programs for entrepreneurs and executives.


Watch my video from the Innov8rs Miami conference below.

 MikeLingle

(Read the Transcript here) 

 

The clients we work with (P&G, Visa, Boston Scientific, HP) are already world-class at product and incremental innovation. They turn to us to learn disruptive 10x thinking and implementation as a core skill.

I decided to switch my focus to corporate innovation after meeting Salim Ismail, author of the bestselling book Exponential Organizations and former executive director of Singularity University. He immediately put me to work solving traffic in Miami (which we’re actually doing something about, believe it or not). Then he explained how he focuses on transforming large companies and cities because they’re big enough to matter, but small enough that you can actually get something done.

In this article, I’m going to walk you through a few case studies of how already-successful organizations leveraged Salim’s ExO Framework to create disruptive innovation and exponential growth. It’s as much about sharing economy business models as it is about accelerating technologies.

And yes, big companies can become more ExO.

 

Focus Areas of Disruptive Innovation

Exponential Organizations are able to deliver 10 times (10x) more impact than established players upon entering a market space. Here are focus areas in which disruptive innovation can occur:


  1. Operational Efficiencies
    Amazon originally built Web Services (AWS) to improve the operational efficiency of their core business. It was only after they had succeeded that they realized they could open it up to the outside world. This unlocked an entirely new market. Now, AWS is so profitable that Amazon uses it to subsidize their main ecommerce business. This allows Amazon to keep prices artificially low, which makes success more difficult for competitors.
  2. New Business Models
    Accelerating technologies unlock new business models, which are coming at a faster and faster rate. It’s difficult for established players to keep up. Uber didn’t have to invent a new kind of taxi to crush the industry. Netflix didn’t have to invent a new kind of DVD to crush the industry. Rather, both companies created new business models that turned the assets of existing players (taxi medallions, Blockbuster stores and late fees) into liabilities. They figured out how to drive a better experience to the customer...at scale.
  3. Adjacent Markets
    Apple owned a relatively small share of the computer market, which it leveraged into a dominant position in the adjacent music player market with the iPod. They had $24 billion in annual revenue when they launched the iPhone into the adjacent mobile phone market in 2007. Within four years, 60% of their revenue was coming from products (iPhone and iPad) that hadn’t existed a few years prior. By 2015 they had grown revenue 10x to almost $240 billion.

 

Apple-Stats

 

Are You a Linear Organization in an Exponential World?

Blackberry once owned the smartphone market, selling over 10 million phones in 2007. When co-CEO Jim Balsillie saw the iPhone for the first time he famously said, “We’ll be fine.” He was right...for a few years.

Screen Shot 2019-05-28 at 1.33.12 PM
Source:  VOX Recode

What was the key difference between Blackberry and Apple?

Blackberry was operating on a linear model while Apple was operating as an exponential organization. The iPhone turned Blackberry’s famous keyboard, which has once been an asset, into a tremendous liability. It was too expensive to change quickly, so Blackberry doubled down on what they thought was their strength. They miscalculated.

And once Apple opened up the app store to third party developers they dramatically increased the value of the iPhone to the everyday consumer. Blackberry couldn’t catch up.

 

The Exponential Curve

Let’s take a look at what the exponential curve means. Moore's Law states that the price / performance of computing power doubles every 18 months. This means new computers (and iPhones) perform twice as fast as old computers every 18 months, while the price of that old chip gets cut in half. What’s interesting is that this doubling pattern has persisted across computing technologies, from relays to vacuum tubes to transistors to integrated circuits. We’re reaching the limits of what integrated circuits can handle—which is why every computer comes with multi-core processors—so don’t be surprised when we switch to a new technology.

Transistors

Other technologies have their own doubling rates. The price / performance of solar panels, for example, doubles every 22 months. We recently passed the point where solar is more cost-effective than oil in new installations. The problem is that battery density only doubles every 8.5 years, which is holding back the transition to renewable energy. The weight that drones can carry doubles every 9 months.

And the price / performance of gene sequencing doubles every five months! Here’s what that looks like when compared to the doubling rate of Moore’s Law:

 

Screen Shot 2019-05-28 at 1.28.22 PM
Source: Genome Gov

All of these advancing technologies work together to unlock new business models at a faster and faster rate. This is where large organizations have trouble keeping up. Their success is what gets in their way.

 

How to Operate (and Thrive) in an Exponential World

The only way to thrive in an exponential world is by operating in an exponential way, instead of using a traditional linear approach. Exponential Organizations outlines the eleven attributes that exponential organizations (ExOs) use to become the fastest-growing companies in the world.

The eleven ExO attributes are:

ExO-Formula

To get more details on each attribute, read Salim’s in-depth article on the “11 Secrets You Need To Know For Exponential Growth.”

 

How can your organization drive 10X growth?

We’ve talked about Apple’s 10X success. To do the same requires three simple steps:

      1. Improve the efficiency of your existing business by at least ten times
      2. Build new Exponential Organizations (ExOs) at the edge of your business by rapidly testing new digital business models
      3. Change your culture to support smart innovation

It’s this last step that’s the most difficult for legacy organizations. Their success gets in their way. The biggest challenge you will face with the parent company is culture. Specifically, your organization’s immune system.

Everyone has great ideas, but the corporate immune system kills promising disruptive initiatives before they can be fully implemented. How can you change your corporate culture?

This is the critical role of your Massive Transformative Purpose (MTP).

 

Supporting Disruptive Innovation with an MTP

An MTP is the core foundation of an ExO. For example, Google’s MTP is “Organize the world’s information.” This powerful MTP attracts top talent from around the world who are excited about the mission. Simultaneously, it pushes away people who do not relate to this MTP. It also serves as a “rudder” for Google by directs their business decisions. Self-driving cars are actually a way of organizing the world’s information, if we think about it.

We recommend that the parent company have its own MTP, and that each new ExO created on the edge its own separate MTP.

MTPs provide organizations with flexibility to adjust course as needed in order to continue to grow.

For example, we can think of Netflix’s MTP as “delivering great video entertainment to people wherever they are.” They started by mailing DVDs, and their clever business model turned Blockbuster’s two greatest strengths into liabilities. First, Netflix didn’t have to open any physical stores, whereas Blockbuster already had a national network of 9000. Netflix also got rid of the late fees that made up 20% of Blockbuster’s total revenue.

 

Netflix: A Case Study in Disrupting Themselves

Blockbuster ignored signs of trouble and passed on acquiring Netflix for $50 million when they had the chance. Netflix’s pitch was that they become the streaming service of Blockbuster.

Blockbuster couldn’t see the future, and didn’t want to do anything to threaten the physical stores that they had spent so much time and effort developing, nor did they want to give up their late fee revenue.

This is the immune system of large, successful organizations in action. We see it all the time.

Netfilx CEO Reed Hastings “wasn't one to take no for an answer. After getting rejected once, he went back to Blockbuster at least three more times to pitch the deal. Blockbuster declined every time. Undaunted, Hastings flew back to California and got back to work promoting Netflix. Four years later, Blockbuster launched its own subscription service, but by then, it was too late. Hastings has admitted that if Blockbuster had launched their own service even two years earlier, they would have driven Netflix out of business.”

Netflix was now the world-champion of mailing DVDs. Most successful companies would have focused on improving efficiency, but Netflix was already pivoting to streaming.

In 2013, after successfully making the switch from DVDs (although they will still send you DVDs as of this writing in 2019), Netflix realized their business model had another flaw: they were held captive by other people's content. In order to go around this, they debuted their first original show, “House of Cards.” They expanded this successful strategy.

In 2018, HBO delivered 500 hours of original programming while Netflix produced 2,392 hours. All of this original content saved Netflix when Disney decided to pull their content to launch their own streaming service. It’s telling that Disney priced their monthly subscription much lower than Netflix, who has a fighting chance in the streaming wars against much larger companies.

Netflix’s MTP of “delivering great video entertainment to people wherever they are” is what allowed them to quickly evolve from DVDs to streaming to original content. They have stayed true to their core identity through all of these changes.

Netflix keeps evolving so rapidly that it’s difficult for other players to threaten them.

 

Is Your Company Ready for an Exponential World?

Today’s companies can no longer thrive by operating with the traditional linear structure of 20th-century organizations, even though that’s what has made them successful to this point.

Technology is accelerating the rate of change, which unlocks disruptive business models faster and faster. Our research at ExO Works suggests that the core businesses of one third of the Fortune 500 will be obsolete within ten years. Many of these companies will be disrupted.

In fact, McKinsey reports that 84% of executives think their business models are at risk while 80% believe that innovation is important to growth strategy—but only 6% are satisfied with innovation performance.

Our clients including P&G, HP, TD Ameritrade, Boston Scientific, and Stanley Black & Decker have all found that they need to adopt the ExO frameworks in order to thrive.


You can watch my video from the Innov8rs Miami Conference here.

(Read the Transcript here)

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