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.

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.

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?

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.

The problem with the economy in the Western world

StephensonWhat is the problem with the economy in the Western world? Jobs are disappearing and exclusion is increasing.

The past weeks backward economic development in Europe and America is observed both by researchers and journalists. Stefan Fölster wrote a debate article in the Swedish newspaper Dagens Industri (Today’s industry) on 10 September arguing that the Swedish industrial production fell by 10 percent in the past five years. The day after, this was discussed in the editorial “Defensive Large Companies Suffocate Innovation” of the same newspaper. The editorial makes references to, for instance, an article in The New York Review of Books called What is Wrong with the West’s Economies? by Edmund Phelps.

In the past I have written about the problems of the Swedish industry in, for instance, Sweden Loses Export Shares and The Decrease of Innovation. In the latter, I discuss a study by Karolin Sjöö about the decline in innovations in Sweden from the 1980s. In the article What’s Wrong… Phelps discusses the same issue, but applied to the Western world as a whole. Briefly, Phelps is of the opinion that our attitude towards innovations and changes has gone through a major transformation lately. In particular, during the nineteenth century there was a great deal of enthusiasm for finding new solutions to old problems. In those days, entrepreneurs and engineers, such as George Stephenson, could develop entirely new transport solutions (the railway) that essentially changed the world.

Stephenson was born of poor parents and all lacked education. But he was a proficient inventor who soon received support from investors and politicians. His biggest achievement was perhaps that he succeeded in building the first railway line in the world. The double lined railway between Liverpool and Manchester. Stephenson, as well as many other entrepreneurs and engineers, was able to achieve huge changes, despite the fact that he was not part of the elite. Many were not even able to read. But, of course, there were also well-trained individuals who achieved a lot. The mathematician and statistician Florence Nightingale fundamentally changed health care through her research. Her proposals were accepted despite the fact that she was woman in a society dominated by men.

As Phelps points out, this type of innovations and changes are uncommon today. Today’s society and the way it is described is based on the perception of the human being as a machine, a robot acting according to a program. They are cogs in the machinery. When these robots are on vacation they are expected to be “recharging the batteries”. To imagine new solutions is almost considered improper. Phelps shows, by using statistics, that in the 1960s America started to decline from the innovation peak. Europe followed a few decades later. This is entirely in accordance with Karolin Sjöö’s results.

The problem with a decaying economy is that exclusion increases, Phelps points out. Unskilled jobs disappear through globalisation and productivity improvements. No new jobs are developed. It is therefore the lack of innovations and changes that lead to the lack of unskilled jobs The frequently acclaimed Silicon Valley is only responsible for 3 percent of America’s economy. It is not too much of Silicon Valley, but too little. Despite the lack of innovations and change, many are nevertheless disturbed by “all” the new products from companies such as Apple. So what is causing this reluctance to change? Phelps does not have the answer. Ken Robinson, on the other hand, proposed an answer. We need creativity and imagination to imagine new things, says Robinson. We all have this as children. But where does the creativity go after that? Adults seem not to have it, says Robinson, and Phelps agrees. We are trained to lose it, says Robinson. It is interesting to note that countries with major investments in science, technology and mathematics do not have more innovations.

I believe we are a product of the same society we are creating. This applies both when we speak about Sweden as a society or an enterprise. We see society as a machine. The many machines we use every day have made us believe that the whole world is a machinery in which we all have predefined tasks, like cogwheels. In order for us to break free from this view, we need to accept that social systems should be dynamic (agile) in order to be able to adapt to changing circumstances. To remain idle is not an eligible possibility. The lack of adaptation in the form of innovations leads to an economy in decline. This leads to exclusion which in turn leads to crime and social unrest.

It is time for innovations and changes in the way we organize society and companies.

Is Tesla disruptive?

Tesla

In an article that attracted much attention in Harvard Business Review the question was posed on how disruptive Tesla actually is. The reply was, not at all.

The concept of disruptive technology was coined by Clayton Christensen in the book The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail. In the book, Christensen shows how new technology often starts off as a “poorer” and cheaper alternative to the existing solution. However, the new technology is getting better over time, and as prices are lowered, the existing companies are overthrown. An often repeated example on disruptive technology is how the mainframe was substituted by the minicomputers, which then in turn was ousted by the PC.

Christensen was not the first to observe this, Joseph Schumpeter discussed the phenomenon already in the 1930s. He called it creative destruction. I am of the opinion that Christensen’s definition is too narrow. Disruptive technology does not need to begin with a product that is poorer and cheaper. Smartphones rapidly killed off Nokia’s and Sony Ericsson’s products which resulted in closures and layoffs. A smartphone is not, as the name implies, a smart mobile telephone. It is a computer packed in a mobile phone shell – also used as a phone! It is not poorer or cheaper. We, the customers, have adapted quickly, a smartphone creates added value for us users. I view smartphones as an example of how disruptive technology essentially transforms the market.

Companies have difficulty to handle changes. They are often stuck in today’s product and business model through their line organization. In these organizations, information and knowledge are power. To make changes in the line organization is not simple, since power is linked to position. In agile organizations, such as Puls, power is to be able to share information and knowledge. Then it is much easier to make changes.

In order to return to Tesla, is Tesla disruptive? Does this change anything for us customers? Is this a threat to the leading manufacturers, Toyota, VW and GM? Tom Bartman, among others, answers no in Harvard Business Review. Christian Sandström followed up with an article in MIT Technology Review in which he answers yes. Sandström argues that Tesla has built an organization that fits the new product, while the established companies are permanently stuck in an organization adapted to the old product.

It is notoriously difficult to anticipate what will lead to creative destruction and important changes in people’s behaviour. Considering the present situation, I perceive Tesla as a new car manufacturer, exactly as said in the HBR article. Moreover, Tesla is part of a major change in the energy market. Operators such as BP, Exxon and Statoil have as much to fear from Tesla, as GM, VW and Toyota. Wind energy, solar energy and batteries are all examples of technologies that, compared to existing technology, were (are?) inferior. In the area of energy, an ongoing classic example on exponential growth and creative destruction is, for example, how Vattenfall is watching its assets being erased at an increasingly rapid pace.

I believe, as does Sandström, that the automotive industry may undergo a fundamental change due to Tesla. Manufacturers stagnated in the diesel technology are in danger of extinction. This is due to a better organization, according to the reasoning of Sandström. Traditional line organizations tend to cement old solutions and business models.

Currently there is new technology under way from Google and Apple that may transform how we perceive cars: driverless cars in urban traffic. Today we see cars as a possession and something we ourselves drive. It should be possible to manufacture a simpler and less expensive car than the cars of today. Basically, the majority of the car buyers want fast and easy transportation. A smartcar that not only can find the fastest route between A and B, but also does it fast and inexpensively might be a winning concept. Today, it is very expensive to own a car that most of the time is stationary. If it was possible to reserve transportation from A and B using an app, and a smartcar arrives a few minutes later, maybe a disruptive technology has seen the light of day. The technology development is under way in this direction. Tesla is contributing to this.

One thing is for certain: changes seldom turn out as intended.

Innovations on the Decline

Innovation-Sjoo-2014

According to new research from Lund University, research and development innovations are declining and productivity within Sweden’s technology companies is slowing.

An innovation is created when a new product comes on the market and changes a particular pattern. A smartphone is an example of an innovation which changed the market for mobile phones and which is currently leading to change within many other markets. This important difference shows how an innovation isn’t the same as an invention. You might be able to say that Ericsson and Nokia invented the smartphone yet Apple was responsible for the smartphone innovation because they understood how the invention could be commercialized.

Innovations vs. Inventions

Joseph Schumpeter was responsible for defining the terms innovation and invention in the beginning of the 19th century. Innovations create new companies, new jobs and economic growth. However, an innovation isn’t solely a creative process – it is also a destructive one. For example, when Apple or Google’s Android developed smartphones, new jobs and huge profits were made for those companies. At the same time, the mobile phone industry in the Nordic countries was practically eliminated. Schumpeter referred to this phenomenon as creative destruction.

Fewer Innovations

New research from Karolin Sjöö and others at Lund University shows that Swedish industry has become less innovative since the 1980’s (as demonstrated by the red line in the graph above). Even more concerning is the fact that productivity within research and development has declined sharply within the same time period (as demonstrated by the blue line). Swedish companies invest more but get less out of it. According to Business Sweden, Sweden’s share of international exports has also declined. Researchers at Lund University have several theories for why innovations have been on the decline but none of them are completely convincing. However, there is other research that, together with our own research, points to an very important factor: projects.

Projects as Isolated Islands

At the end of the 1980’s and beginning of the 1990’s, Sweden’s industry increasingly used projects. Projects were described as the solution to every problem. There were early warning signs and many who paid attention to these signs. Companies that had started working in project form early on (such as Toyota, which started working with projects in the 1950’s), noticed an increasing degree of sub-optimization. Projects and project managers were singled out as the reason. American research in the 1980’s named autonomous projects as a problem. Even Swedish research in the 1990’s warned of this phenomena. A project can’t be seen as an isolated island, as Mats Engwall and Anna Jerbrant determined in their respective research. In all the companies we have studied there are significant problems with methods for managing research and development when using projects. All of these companies have significant problems with productivity. There are problems determining how much work is actually going on and there are complaints about the lack of resources when what is actually lacking is control and focus.

Bureaucratic Project Models

The project was promoted as a modern form of working based on cross-functional work. In reality, projects are bureaucratic monsters that create greater distance between people. Process-based development models (see stage-gate models, waterfall models), suppress creativity and, counter to their intentions, create a slightly chaotic business.

Popular definitions of projects maintain that a project has a clear goal yet reality tells us differently. Our studies shows that no one really knows the goal of the project or that there are many differing opinions about the goal of the project.

An Agile Network Organization

Road to an agile network organisation
Road to an agile network organisation

The solution to the inherent problems with projects is not to stop using them altogether. Rather, the solution is to implement a structure that allows management to prioritize and re-focus the organization. The solution is also to work with R&D at a strategic level, sometimes called a multi-project level. Toyota reformed their organization during 1991-1992 in order to have a more coordinated collaboration. These reforms were led by Takeshi Uchiyamada. As Chief Engineer within the new Pulse agile organization he developed a whole new kind of car: the Prius. He managed to accomplish this in record time – just 3 years. As Chief Engineer in the new organization he was a part of strategy-focused management. This differed from the old organization in that the different projects didn’t have to compete with each other for everything from resources to clients.

While working on the Prius, Uchiyamada continued to develop his multi-project solution by holding daily stand-up meetings in an Obeya. We call these Pulse meetings in a Pulse room. Scrum has developed a similar solution for project management that makes it possible to replace bureaucratic models with agile solutions.

As you just read, I outlined what Toyota did: they continued to develop their team-based approach while at the same time introducing a concept that made it possible to work strategically. Operations need to be decentralized when using projects yet at the same time they also need to be coordinated. In the entry “The Handlesbanken Way” you can find information about what being decentralized yet still being under the control of management entails. Thanks to agile multi-project organization, Toyota starting using a tool that enabled them to be both inventive and develop new technologies (including hybrid-drift and fuel cells), while at the same time being able to commercialize these inventions and thereby produce innovations. This might have been a more important step for Toyota than lean production. Just how important it has been is indicated by Uchiyamada’s career: after his role in the development of the Prius he has occupied several top posts, including head of development. Today he is the Chairman of the Board at Toyota Motor Corporation.

Increase Innovations!

The pulseroom where different teams has daily stand-up meetings.
The Pulse room, where different teams hold daily stand-up meetings.

There are some very frightening statistics that the researchers at Lund University are presenting today yet they come as no surprise to us. We know what the problem is. There are solutions that work and we know how to implement these solutions. Most companies have realized that they have a problem and during the past ten years, many companies  have taken the same steps as Toyota and implemented an agile network organization. It’s high time for the latecomers to upgrade their organizations because if they don’t there is a risk that Nordic inventions, like the smartphone, will become lucrative innovations somewhere else in the world.

The Agile Product Development Process

Agile Product Development ProcessThe agile product development process is based on a combination of iterative work and strategic positioning. The process is determined by the demands of each particular situation.

According to the current norms it’s necessary to have a product development process. An online search results in several images of what one may look like and all of them are noticeably similar: product development is depicted as a conveyor belt in which every step of the process is defined in advance. Why?

Process as a Noun

Organizational theorists have long championed an events-based approach. However, language is a hindrance to that. Languages are based around nouns – things you can touch. Events are verbs – something one does, change, a process. One of the first pioneers for an events-based approach was Mary Parker Follett in the 1920’s. She pointed out that decision are a result of the work of many people. Decisions should therefore be seen as processes rather than things. However, the images describing so-called processes aren’t verbs – they’re nouns. The fact that we can turn a verb into a noun is a side-effect of our noun-centric language. We can change something living into something dead.

The pictures of processes, oftentimes drawn, all have origins in the 1960’s along with depictions of strategic planning. When strategic planning, together with the conveyor belt principle, had been tested all over the world, heavy criticism from researchers and practitioners emerged. One notable critic was Jan Wallander at Handelsbanken, who claimed that the plans said more about the past than the present.

Process as a Verb

When organization researchers such as Parker Follett talk about processes it’s so we can understand that it’s what we do that’s important. They use terms such as strategizing instead of strategies and processes instead of plans.

When we at Pulse use iterative means to work with visual management instead of a plan, it’s a shift from a noun to a verb. Through people’s work and interaction at daily stand-up meetings and workshops a dynamic process is created. It’s important to understand that the development process can’t be determined in advance. However, it’s possible to plan and to organize but only as long as it’s about planning and organizing. That is to say that one works with the issues all the time, daily and continuously.

Agile Product Development Process

In the picture below the company is portrayed as a network of interacting groups, such as management groups, project groups and working groups. A company that uses their whole organization to understand the world at large can make decisions with far-reaching understanding in their strategies. They can home into the signals of the world at large early, process the information internally and implement the necessary measures. When management works using Pulse meetings in a Pulse room, we refer to it as an agile network organization.

Pulse room (obeya)
Pulse room (obeya)

The images seen on Pulse boards are a real-time image of the ongoing process. The image is always in flux. Because there is a collective image that represents reality, the management and others in the company can supervise what is happening and they can act on the company’s needs, just-in-time. Management can’t micromanage what the groups will do, and in that sense they don’t have control of every little detail. However, management exercises leadership through daily stand-up-meetings with full transparency about what is happening. Through their work, management creates strategizing in line with the company’s vision and mission statement. This makes the company agile and it has an agile product development process.

Adaptation

Companies that are successful have the ability to quickly adapt to changes. A company that has the ability to create changes in the market and can exploit new opportunities  has the potential to become very successful.

To adapt is a verb. You can observe the feedback that comes from the market through salespeople, service technicians and other channels. You can make yourself familiar with your current situation and find different possibilities for action. You can choose a course of action. And finally, you can act. This iteration is repeated all the time but the situation is always different. Each time you act the world at large changes. Also, you are not the only one changing the world around you.

Important factors for success include the ability to receive information and understand the world at large, to be able to show an internal versatility and the ability to get things done. A company that demonstrates a low degree of adaptation is low-dimensional. One example of low-dimensional companies are the businesses that work using detailed static process images. These companies risk being put out of  business.

Adaptation

So why do companies try to work using process descriptions? Because there is a notion that companies must have them. Images are powerful. It might be easier to bankrupt a company than to remove the process images.