If the classical models of organization are not sufficient to withstand the challenges of a more digital, faster and uncertain world: Which organizational model is? Imitating silicon valley may do the trick for software companies, but which model should a company choose in other sectors? One option is to transform into an “exponential organization”.
Scarce Resources – linear world
Resources in this world are scarce. Companies that make efficient use of resources are successful in the market. The dynamics of demand and supply determine the price of a scarce good. Traditional business and economics theory rests on scarcity. Companies scale their supply upwards until the marginal costs of providing one additional unit is equal to the price. Unit per Unit a company scales upwards, in a linear manner: One unit of capacity more, one unit of costs and one unit of revenue more. The mathematics of this kind of model is linear.
Abundant resources – exponential world
Now imagine a world where some resources are not scarce. Some resources are abundant, they are more than enough. Information – for example, as seen in the last post is abundant. If a business model is based on an abundant good, the marginal cost to add capacity is near zero, the cost of scaling are near zero and profits will explode (given sufficient demand).
Now picture, that each additional unit sold sets the stage for two more units sold in the next time period, as customers value the product and tell others, as the network effect of being a customer, a part of the community, pulls in customers through positive external effects. Boom – you are in to an exponential growth of the organization in revenue and profits.
How to find abundance
All well and nice, but resources outside the realm of information goods are scarce. How can this possibly be an organizational model for traditional industries, e.g. for brick and mortar retailers and the like?
Ray Kurzweil, an influential thinker on artificial intelligence and since 2012 questing to bring natural language processing to Google, argues that abundance replaces scarcity more and more, in more and more sectors. Moores law, the doubling of computer power every two years, continues to hold true. This leads to abundance in other sectors: the use of mobile phones, the price of genetic scans, nanotechnologies, internet usage, data available in this world – all grow exponentially.
Source: Yuri van Geest, 2014
The transmission mechanism to classical sectors of this exponential growth is “orthogonal“. i.e. information technology enabling advances that make resources- which have been scarce before- abundant. For example: 3D Sensors (LIDAR, such as used on the google car) have been priced at 20.000$ in 2009 and have been valued at 79$ in 2014. This again makes positional data available for production or logistics applications or the ordinary retailer, that may analyze what customers do inside shops in a detail that never deemed possible before. For more examples see Ray Kurzweils presentation (2009).
One advance triggers two or three other advances which in turn trigger 4 or 6 other advances etc. Each advances leads to dropping prices, which lead to abundance of a once scarce resource.
Salim Ismael and Juri van Geest argue in their 2014 book “Exponential Organizations“that abundance is a matter of perspective. Of course, physical goods are not abundant per se. They must be produced. But here comes the thing: Industries need to find the abundance in their sector and harness this abundance, make it available to their customers and build their business model based on this abundance.
Let’s take the example of a traditional sector. For Hotel chains, it is very costly to add new capacity. You need to build a new hotel to add to the supply of hotel accommodation. That is a high marginal cost. Hotel beds are a scarce resource. But accommodation is not a scarce resource. Accommodation is everywhere humans live. Accommodation is abundant. Enter AirBnB. Adding additional accommodation capacity is easy for AirBnB, as it taps into the abundant resource accommodation. People are not looking for Hotel beds per se, they are looking for accommodation. Accommodation has just not been abundant before, AirBnB made it abundant.
The same principle can be found in the sector for Personal transportation, which has been revolutionized by Uber or in Europe by the likes of BlaBlaCar, Drive Now et al. Or think of ebay or Craigslist or even amazon. Supply of consumer goods used to be limited at a certain space and time – and it went to be abundantly available everywhere by those shopping sites now.
Abundance has much to do with sharing. It has less to do with ownership. All the companies named above are more platforms for exchange than just companies supplying one products and services. The concept of Ownership works well for scarcity. The concept of sharing works better in an abundant, information based world.
Three key take aways:
- Abundance is something to be searched for in every companies business sector and model
- Abundance can be predicted by looking at the technology advances and forecasting the likely impacts, the opportunities created and the threats
- To utilize or create abundance needs a new, “exponential” business model. The linear model of managing companies is not going to be able to either create or use abundance
Wait, this smells like futurism!
We all have seen it before. Futurists predicting the world will change – nothing will remain the same. In fact, Ray Kurzweil predicts that humans will transcend biology by 2045, a singular event in human evolution.
Still, Ray Kurzweil is working on mundane stuff such as the processing of natural language for google. And his arguments made in his 2006 book “The singularity is near” is widely considered as being rather on the mark, even now in 2016. His prediction points towards the exponential mega trend that is impacting reality today. It is not the only force, tough, and Kurzweil acknowledges that.
Abundance of one good does not mean that every good is cheap, the end of work, the end of poverty etc. It just means that one good is abundant, and that has the power to transform whole business sectors. Overall growth of the economy , as described in a previous post, may still be depressed. However, a company will ignore this trend at its own peril.
Next, lets take a look at a business model that allows to fully utilize abundance- the “Exponential Organization” – in the next post.