Thanks to digital technology, change has become exponential. Business leaders need new tools, new skills and most importantly new thinking.
In this chapter, we’ll see how network effects drive exponential growth and discover a new model for exponential leadership.
Perhaps the most fundamental area where we need to update our mental models is from an incremental model of change to an exponential one.
Incremental change (10%) is constant, while exponential change (10x) has an increasing rate.
Incremental change is linear and additive, while exponential is non-linear and multiplicative.
While the incremental is about 10% improvements, the exponential is about 10x acceleration.
Imagine someone taking 30 steps. These are incremental steps of about two feet each. You have a pretty good sense that it’s about the length of a very large room.
Now imagine someone taking 30 exponential steps, meaning each step doubles in length from the one before. How far would that be?
It turns out it’s nearly the distance to the moon.
If the automobile had advanced at the same rate as the computer, it would go 500 miles an hour, get 200 miles to the gallon and cost $1.50.
We all know Moore’s law about exponential increases in capacity for computer processors.
The same holds true for technologies like storage, bandwidth, IoT sensors, artificial intelligence, blockchain and genomics.
But what does that mean for organizations and leaders?
Why do 90% of digital transformation projects fail to meet expectations and only deliver incremental improvements?
One reason companies struggle with digital transformation is because they think technology alone will deliver exponential results.
When you have exponential technology but incremental thinking, you end up with incremental results.
Wikipedia was originally called Nupedia. It had the same management, technology and mission: to be the world's largest international peer-reviewed encyclopedia.
But Nupedia had a central team that reviewed articles using a seven-step approval process. The result? Only 21 articles got approved in the first year.
Then they reinvented themselves as Wikipedia, which is based on a very different mental model: one that sees the audience not as consumers, but as producers.
With the community editing the articles in alignment with a shared purpose and set of principles, Wikipedia posted 18 thousand articles in the first year.
Network effects occur when value increases for all members of a network as each new member joins. With network effects, a single interaction can ripple out to generate multiple subsequent interactions.
Consider building a tower of blocks or lining up a chain of dominos. Each block or domino can only impact the one right next to it. This kind of linear relationship can only deliver incremental results.
Now imagine a contraption made up of mouse traps and ping pong balls, like the one in the video. Dropping a ball into the box leads to a chain reaction in which each ball can set off multiple other traps.
Where blocks and dominos are linear and either one-to-one or one-to-many, the ping pong balls generate a network effect because they are non-linear and many-to-many.
Consider the different strategies of Google Maps and Waze. Both are owned by Google and use a traditional advertising-based business model. Both also have the goal of helping people navigate and avoid traffic. But they have quite different exponential strategies.
Google Maps works by creating a network effect between devices and data. Google can tell where people’s mobile phones are and how fast they are moving at any given time. That enables them to know where the traffic is in real time.
By contrast, Waze works by creating a network effect between drivers and passengers. Waze has cultivated a community where people share what they are seeing as they are driving.
Both Uber and Airbnb have platform-based business models. They don’t turn inputs into outputs like most companies. Instead, they are multi-sided platforms that connect supply and demand.
Uber doesn’t employ drivers or own vehicles. Airbnb doesn’t own hotels or employ housekeepers. Instead, Uber’s platform connects people who have cars with people who want rides, and Airbnb connects people who have rooms with people who want a place to stay.
Take a look at these charts for Uber and Airbnb. You can see how the number of drivers and rooms have grown exponentially. This would never have been possible for a taxi company or hotel chain with a linear business model.
Uber and Airbnb aren’t alone in using multi-sided platforms as business models. YouTube, Paypal, and Amazon have all done the same: connecting creators and viewers, senders and receivers and retailers and consumers.
The exponential model of leadership looks quite different than the existing model. It’s not about hierarchal command and control, but rather about creating the conditions under which network effects can arise within your organization.
People say “fail fast” and “it’s ok to fail,” but some kinds of failure are unacceptable. To avoid high-stakes failures, you need to practice falling under less risky conditions.
Professional skiers have a saying: “Find your edge,” mean find how far you can lean over without falling. And the only way to find your edge is to fall during practice.
If you’re skiing so cautiously that you never fall, you’re not pushing yourself enough. But you need to fall without hurting yourself so you can get up and go back up the mountain.
For exponential leaders, the mantra is “Fall, don't fail.” You need to learn how to fall in a way that you can get back up.
Nobody likes to fail. But learning how to fall well is an important part of transformational learning.
Think about times in the past when you’ve learned from not getting the results you expected.
What’s a time when you have ”fallen without failing”?
What did you learn from it?
Start fleshing out a vision for exponential innovation.
Look at WHAT, WHO and HOW to actualize your vision.
- What do you see as possible?
- Where do you want to create exponential results?
- Who could help you develop and refine this vision?
- Who are your thought partners?
- How might this vision become a reality?
- What mindsets & toolsets do you need?
Read “To Build Your Platform, Network Your Capital” by Mark Bonchek