Salim Ismail

Salim is a technology strategist, software engineer, and serial entrepreneur. His book, Exponential Organizations was No. 1 on Amazon’s Best Sellers on Business Management. He is the founding Executive Director of Singularity University and ran Yahoo’s Brickhouse internal incubator. His last startup, a news aggregator, was sold to Google in 2010.

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Our guest editor Joel Hladecek interviews Salim Ismail about the future of business.

BENTO: What should be the most pressing concern for companies today?

ISMAIL: As we turn the world increasingly into information, we are seeing that more and more industries are being affected. So the big concern for companies today is that every industry is ripe for disruption. We saw this with the music business, newspapers, and books, but now we’re seeing very traditional industries like hotels and taxis that are being disrupted. Five or six years ago, nobody dreamt that you could radically disrupt the hotel business, yet today Airbnb is the biggest hotel chain in the world on every statistic, while not owning any hotels. We call this phenomena exponential organizations, a new breed of organization that can scale as seamlessly as the technology scales.

Our old way of building a business was to get an asset or workforce, put a legal boundary around it, and sell access to scarcity. Selling scarcity has been the foundation of business from the beginning of time. But this new breed of exponential organizations has learned to put business models around abundance. Airbnb is leveraging the confluence of payment systems, messaging, location, reputation, and social networks to information enable your extra bedroom—and there is an abundance of extra bedrooms lying around. If you own a car, it sits empty 96% of the time—Uber is tapping into that latent abundance.

While the Internet allowed us to drop the cost of demand exponentially (using online marketing, referral marketing, and viral loops), exponential organizations have figured out how to drop the cost of supply exponentially. Airbnb’s marginal cost of adding a room to their inventory is almost zero. If you are Hyatt, you have to build a whole new hotel. So the really big concern for companies today is that they are likely to see disruptive startups enter their industry with almost no marginal cost of supply. How will they compete with that?

BENTO: What can a company do to be prepared for exponential change?

ISMAIL: There are four major recommendations we have for companies to prepare for exponential change:

1. First, update your leadership and educate them that we are living in a new reality. By leadership, we mean not just the C-Suite and senior management, but the board as well. Twice a year, we run a four-day event with Deloitte and XPRIZE for 80 CEOs of Fortune 500 companies. We give them two days of briefings on accelerating technologies and two days of discussions on how to organize for it. We asked them beforehand how aware they were of disruptive breakthroughs, and 75% said that they had little or no awareness of them. After the four days of briefings, we ask them how big an impact those disruptive breakthroughs would have on their industries. We gave them a timeline of two, four, six, eight, and ten years, and a severity scale of low, medium, high, and game-changing impact. The results were astounding—80% of them agreed that these breakthroughs would have a game-changing impact on their industries within two years and 100% of them agreed that they would have a game-changing impact over five years.

2. Our second recommendation is to not undertake a massive business transformation project. They take too long, cost too much, are intensely political, and you risk throwing the baby out with the bathwater. Unsurprisingly, 75% of such projects fail. Our strong recommendation is to find the disruptive change agents within your organization, take them to the edge in small teams, keep those teams completely stealth, and direct them to disrupt an adjacent industry.

Larry Page of Google asked me a few years ago whether he should build an incubator similar to what we did at Yahoo. My response was no, because you would suffer the same immune system response that is typical in such situations. I told him that he should do something similar, keep it stealth, and point it outwards. You can see the result in Google X. Disruptive teams leverage Google’s core information management capabilities and create new information streams in adjacent areas, using hardware like the Google car, Google Glass, contact lenses, and so on.

Actually, the master of this technique is Apple. Yes, Apple has a great design capability and a great technology supply chain, but I argue that their core innovation is an organizational one. What Apple does unlike anybody else in the world is take a small, disruptive team to the edge of the organization, keep it completely stealth, and direct them to disrupt another industry. So they started with music, then smartphones, then tablets, and now payments, watches, cars, and healthcare. There’s literally no limit to their market cap—they can just knock over industry after industry. As we enter a world where either you are the disruptor or the disrupted, we believe that most other companies will be forced to follow suit.

3. An extension to the previous point is to collaborate with incubators, accelerators, and entrepreneurs outside your organization. As Peter Diamandis is fond of pointing out, “If today you’re relying on innovation solely from within the organization, you’re dead.”

4. The final recommendation is to pick four of the ten characteristics of exponential organizations and incrementally implement them into the existing organization. Community, algorithms, dashboards, and/or the lean startup methodology are being aggressively implemented into many big organizations globally.

BENTO: What can a fresh MBA grad entering or re-entering the workforce do to prepare for an exponentially changing future?

ISMAIL: There are three key recommendations we have for new business graduates. First, recognize that all our education, training, and intuition about the world focuses on linear estimation. If I take 30 linear steps, I’ll go 30 meters and it’s easy to predict where I might be a third or two thirds along in that progression. But if I take 30 doubling steps—one, two, four, eight, sixteen, and so on—at step 30 I’ve gone a billion meters. That’s 26 times around the world and a bit further than 30 meters. Today, as we information-enable industry after industry, their price performance is accelerating in the same way Moore’s law has caused 60 years of acceleration in computation. For example, with Tesla and the Google car, Moore’s Law is impacting transportation for the first time in a hundred years. So, understanding this distinction is critical.

Second, it is critical today to keep abreast of new technology breakthroughs.

And finally, we strongly recommend watching for doubling patterns out in the wild. For example, India doubled its solar footprint in 2013, and did it again in 2014. They’re starting from a small number, but we know that once you have an information-based paradigm the doubling patterns stays on track.

BENTO: You’ve spoken about orthogonal disruption; what is that?

ISMAIL: Clay Christensen, in his immortal Innovator’s Dilemma, first gave us a theory set around disruptive innovation. One area where that needs to adapt is that when he formulated his approach, markets were relatively stable. But today, innovation in one area can radically disrupt adjacent areas… and they’re very hard to spot. For example, a service called focus@will streams music that will put your brain into a focused state. If you’re Red Bull, you need to be tracking that, because if people start using it, they might drink less Red Bull product. But in many cases, convention would dictate that Red Bull’s competition comes from 5-Hr Energy and other caffeinated drinks. They simply won’t see it coming and it might disrupt their market. For another example, it turns out focus@will is better for all the kids with ADD/ADHD than any of the drugs on the market today. If you’re the pharmaceutical supplier of those drugs, you will not think to track a music service. Yet it might destroy your market.

BENTO: What companies are doing a good job of preparing?

ISMAIL: We are seeing about 100 companies today following the ExO model and scaling rapidly. Some obvious examples are Google, Amazon, Facebook, and Apple. But some traditional companies are also aggressively preparing for disruption. GE has trained 60,000 executives in the lean startup philosophy—the biggest corporate training exercise in history. Paul Polman, the CEO of Unilever, has ordered every brand in his company to take on what I call an MTP, or Massive Transformative Purpose. Coca-Cola is attempting disruptive innovation transparently in the mothership—we are fascinated to see if they crack the code on that. But frankly, most companies are not preparing at all. They either don’t see the disruption, or a cognitive dissonance appears and they bury their heads in the sand.

BENTO: What sectors would seem to be at the most risk for disruption today?

ISMAIL: We’ve seen the disruption in music, books, and newspapers. Today, it is clear that education will go fully digital, along with healthcare, financial services, and transportation. Even energy (because of doubling patterns in solar) will be disrupted. In some cases, like healthcare, regulatory barriers in the industrialized world will slow the disruption. We expect to see that disruption first take hold in developing countries, and then occur in the industrialized world.

BENTO: Are there any industries or disciplines that have a higher likelihood of not being disrupted—or is the burden equally shared?

ISMAIL: We divide the world into three categories of industries. First, you have companies that operate in very physical environments like construction, oil and gas, or retail. Then you have a layer where the product is physical, like your Kindle or iPhone, but where all the revenue is information. Finally, with the rise of the Internet, we are seeing fully information-based industries. The world used to be predominantly physical with a sprinkling of information businesses, but now we are seeing that inverted. The Tesla is not really a car with computers in it, it’s a computer with wheels. In fact, because it updates itself periodically, it’s actually an app! Basically, the healthy assumption in any industry today must be that you will be disrupted.

BENTO: What skills can an employee or young worker develop that will minimize the likelihood of obsolescence?

ISMAIL: There are several skills that young workers can develop today. We have already mentioned the linear to exponential distinction. Second, they must stay on top of technology disruptions and breakthroughs or risk quickly being left behind. Third, understand the techniques being used by exponential organizations and learn to implement them. Finally, and perhaps most importantly, a key driver of success in future is whether young workers are following their passion. Those that are will radically outperform the rest of the workforce.