A Primer on Exponential Technologies

In May, I had the opportunity to present at the Front End of Innovation conference in Boston on the emergence of Exponential Technologies and the corresponding effects on corporations. Here is an overview of the discussion:

To simplify substantially, there are two primary traits of Exponential Technologies. First, the most defining characteristic is the pace of price halving and performance doubling (a.k.a. price-performance doubling) over a short period of time, often 12-24 months, and for an extended duration. During the early period of growth, small yet exponential changes are imperceptible. However, during later stages the changes seem unfathomable. A great example: The mobile phone in your pocket is now 1,000,000x cheaper and 1,000x faster than a supercomputer from the 1970s. It's a strong bet to think that no one in that era expected such drastic improvement so quickly. Second, Exponential Technologies all share the trait of having experienced a marked shift from scarcity to bounty, or abundance. This could be an element in the value chain of a product that has become abundant, or it could be the product itself. Digitalization of previously scarce resources is a key contributing factor here, as digital data is cheap to copy and democratized. 

The impacts of Exponential Technologies are easily observed by considering the companies that have suffered the greatest losses, or gained the most, at the hand of this phenomenon. Kodak is the classic example: A one time $30B market cap business, Kodak is known for innovations such as invention of the digital camera, the launch of the FunSaver line of disposable cameras, and the acquisition of Ofoto.com. Kodak fell victim to bankruptcy, however, as a powerful new entrant, Instagram, emerged as an estimated $18B market cap company in the course of its first 18 months of existence. Similarly, Airbnb grew to a $30B valuation in the course of just a few years (far surpassing Hyatt's $9.4B high water mark in the room rental industry), and Uber eclipsed the $60B mark in its first few years.

The domains experiencing exponential innovation have extended well beyond the best-known example of computational power, as described so popularly by Moore's Law. Gordon Moore first observed the phenomenon of price-performance doubling of computing in 1964 and expected it to persist for a period of up to 10 years. Time has shown that the persistence has far exceeded the expectations of even the strongest prognosticators, as Moore's law continues to amaze us into 2017. Recently, we've seen innovations following exponential price-performance doubling patterns in a multitude of categories, including:

• Artificial Intelligence
• Autonomous Cars
• Biotechnology
• Blockchain Technology
• Drone Technology
• Genomics
• Nanotech
• Renewable Energy
• Robotics
• Sensor Technology
• Speech and Voice Technology

On the surface, it's easy to feel the impact of exponential growth in these categories, as we have been experiencing innovation as consumers for the last 20+ years. What's less obvious is the way that abundance and digitalization in such domains have changed the rules of the game for corporations, and in substantial ways:

• Economics: The primary effect of abundance is the convergence of the marginal cost of supply to near zero, in many cases. This challenges traditional micro-economic notions such as supply and demand curves. Macro-economically, measures such as Gross Domestic Product begin to break down as resources become free. There are few measures for the value created by the democratization and demonetization of information, for instance. Consumption of information has sky-rocketed, but without revenue attached to it, there is no easy way to measure the impact of free digital information. No one would argue the significance of free information flow through wikipedia, social media networks, and other digital resources to improving decision-making.
• Business Valuations: As discussed above, we've seen companies emerge with larger market caps than their entire industry in extremely short periods of time, and without (ever?) achieving profitability.
• Labor: One of the hallmark traits of Exponential Technologies is a shift from scarcity to abundance. Robotics, for instance, is an Exponential Technology experiencing price-performance doubling -- and we're about to enter into the "unfathomable" growth stage. In the case of 3D printing, we should expect to see a shift in labor from the manufacturing sector to consumers' homes - cutting out even the robots! By printing out your next pair of Nike Fly Knit sneakers, you'll be doing work that was once done by cheap labor forces in China.
• Poverty: Coinciding with the emergence of Exponential Technologies has been a remarkable and exponential decline in poverty levels, even as global population exponentially grows. This is best illustrated by looking at Absolute Poverty, which has fallen from between 25% and 27% in 1990 to well under 10% worldwide today. In the 1800s, nearly 75% of the world was living in absolute poverty. Since the invention of the steam engine, the standard of living has doubled, on average, four times per generation. Child mortality has fallen by 10x, per capital income has tripled, global literacy improved has improved to 80% from 25%. Costs of electricity, food, transportation, and communications have fallen between 10x and 1,000x. These rates are still accelerating, exponentially, today.
• Innovation: With emergence of these Exponential Technologies has come a profound shift in how companies, and the world, views innovation. There has been tremendous growth in R&D spending. As components and technologies become smaller, faster, and cheaper, increases in R&D spending produce exponentially more innovation than earlier eras. Emergence of platform technologies has driven the creation of more content/product/output, faster, than at any time in our history.

Corporations must make radical adjustments to recognize the potential impacts of these technologies on their business, to survive, and hopefully to thrive amidst this accelerating pace of change. Several tactics organizations can take to improve their outlook in this brave new world include:

• Transform Leadership: New education & new leadership styles are required. There are new rules of strategy that must be learned, and the old un-learned. Command-and-control organizational structures are effective at managing scarce resources, but are not adequate for managing abundance.
• Invest Outside the Core: A corporation's core business generally is designed to do one thing very well. It must be managed effectively and efficiently, or the alternative is death. However, corporations must be investing in new technologies and looking to research labs, universities, venture funds, and accelerators to find the next emergent business line, even if it competes with the core.
• Partner With Start-Ups: Corporations cannot afford to not be in touch with the start-up world. Start-ups tend to have one-dimensional approaches to solving business problems that are not anchored in the complexity of legacy business issues. Even if a start-up's product is not a perfect fit for a corporation, the underlying platform or technology may be beneficial to corporations in transition. Further, start-ups have pliable business models which allow them to nimbly cater their products to the precise needs of their biggest customers.
• Take New Risks: Fire the occasional moonshot. Create a black ops team to disrupt your own company. Unlock and harness new data sources to develop key insights & advanced algorithms.

While organizations are busy managing their customers, capital, employees, and complexity, new entrants are coming onto the scene which have different constraints across these dimensions. Fewer customers, less capital, fewer employees and less complexity for start-ups in Exponential Technologies translates to a higher risk tolerance for start-ups than corporations can afford to take. Corporations must continually scan the horizon for the next big wave, at the risk of missing it. They must develop solutions for what the world will look like in 2-5 years, not what it looks like today. Even if they do everything right, the laws of exponentials may ultimately make their odds of success unfathomably low.