Exponential opportunities and business models
Understanding the difference between linear and exponential is essential when considering the performance and adoption of new technologies.
“The greatest shortcoming of the human race is our inability to understand the exponential function,” says Pascal Finette, Chair for Entrepreneurship at Singularity and co-founder of Radical Ventures. “As a result, we default to a linear world view.”
To illustrate the difference between the exponential and linear, Finette gives the example of a person taking 30 linear steps, which would take them about 30 meters; the same person taking 30 exponential steps, in which each stride doubles in length, would travel 25 times around the earth. While the first few linear steps and exponential steps are about the same length, the exponential steps quickly start taking giant increases in length.
Understanding the difference between linear and exponential becomes essential when considering the potential performance and adoption of new technologies. With exponential technologies, such as genomic sequencing, AI and computational power, change begins gradually before becoming sudden and steep. It becomes imperative, then, that innovation strategies not only explore the next, but also imagine the beyond.
Watch this FORBES video from the EY Innovation Realized summit where business leaders talk about business transformation.
The fallacy of soon
This sometimes leads to what Finette calls the “fallacy of real soon”: a technology can be introduced before the market is ready with the resulting disappointment causing people to dismiss it just when it is capable of being disruptive. Finette believes that voice-based home assistants fall into this category. The eight-year-old combination of voice recognition and AI delivers a sub-optimal experience now, but another eight years of exponential improvement in their skills will yield devices that are 128 times better than today’s — better than humans in understanding human requests.
Disrupting the supply and demand dynamic
The dynamics of exponential technologies are creating a world of abundance, in which data is what creates value and the cost of creation, duplication, distribution and storage will soon go to zero. While current business models are structured to price based on scarcity, the world of abundance will have two fundamental business models:
- Embracing the rare (high price/low volume) — developing artisanal products and services across the dimensions of brand, social interactions, experiences and personalization
- Embracing abundance (low price / high volume) — becoming a platform that gives convenient, curated access to range of goods and services
“Companies will have to choose between the two,” notes Finette, “but most are stuck in the middle. They are not offering truly bespoke experiences and so can’t charge for them; nor do they have the scale to compete in the world of abundance.”
- Does your strategy assume a linear scale of change?
- What technologies could be exponential in your market? What would be the impact of five or 10 years of exponential improvement?
- How prepared is your business model to embrace abundance or the rare?
The need for a transformative innovation approach
The opportunity of exponential technology change and accompanying industry disruption creates an imperative for a new innovation approach.
To deliver on market expectations, companies must run strategies that optimize the business of today, while simultaneously investing in the technologies and business models needed to survive and seize the upsides over the longer term.
Taking a future-back and outside-in approach to developing the innovation vision and portfolio of investments is essential to attracting capital and top talent. The goal of the future-back approach is to envision what lies beyond today’s market definitions and business models and then work backwards to define the organization’s next growth strategies; and, finally, to establish the priorities and actions to drive the strategies in the immediate term.
“It is important to have a compelling vision of your relevance in the future market that drives near term innovation,” notes Michael Kanazawa, EY Global Innovation Realized Leader. “With exponential technologies you can’t wait until they are mainstream to jump on board. You need to have a capability to experiment and test new products, services and experiences early and drive them to full scale quickly when the market takes off.”
Understanding when to quickly industrialize innovations requires using data to constantly track the launch and scale phases of innovation. Pete Blackshaw, CEO of Cintrifuse, observes: “You don't need to do everything at once. You can start small and then grow and quickly iterate. What's beautiful about the environment today is that you can gather data in real time.”
Watch this FORBES video from the EY Innovation Realized summit to hear business leaders talk about using technology to reinvent current business models.
The result should be the creation of new businesses aligned with broader shift toward companies that are:
- Future relevant
- Human centered
- Asset light and data heavy
- Driven by agility, innovation and technology at speed
- Oriented toward continuous business model reinvention
“To radically rethink existing businesses using technologies like blockchain, artificial intelligence and machine learning is an opportunity to drive even more efficiency and return into the business today,” says Richard Suhr, EY Global Digital Advisory Leader, adding that “the other opportunity that these technologies create is to rethink the business model itself.”
- How have you changed your innovation processes in light of exponential opportunities and risks?
- Is your innovation for the next horizon as effective as your innovation to sustain current performance? Will you be able to keep pace with exponential change?
Three tactics for transformative innovation
Dynamic venturing, faster traction, and funding transformation
1. Dynamic venturing: accelerating incubation to transformation
Companies have traditionally approached innovation through a range of activities, from hackathons to corporate venturing; yet, these activities often are not tied to a desired outcome for a given phase of innovation. “What is really needed”, says David Jensen, EY Americas Disruptive Innovation Leader, is “dynamic venturing with a more holistic view of how to use a range of external relationships to innovate.”
Dynamic venturing matches the innovation tool — whether innovation challenge, accelerator or spin-out — to the business need at each phase of the innovation continuum, from early stage ideation to later stage scale-up. Its goal is to augment the corporate build-partner-buy activities with the accelerated processes used by lean start-ups — the iterative build-measure-learn cycle that results in rapid prototype development.
2. Shift from MVP to minimal viable segments: gain traction faster
The creation of a minimum viable product (MVP), defined as the minimal product to meet the needs of the market, has been viewed as an important step toward transformation. However, the MVP is not adequate, given exponential technologies and business models. The concept has largely failed in practice because it leaves out critical piece of information: customer need. The resulting product is neither minimal nor viable. Feature creep is big issue as companies try to develop features to address disparate customer concerns, yielding a product that doesn’t work for any one of them.
It is time to move away from the MVP in favor of the minimum viable segment (MVS), in which the minimal product is tailored to the needs of a specific set of customers. By providing a go-to-market product fit, the MVS is highly referenceable (i.e., users will refer other potential users), predictable (i.e., a consistent, known buyer) and allows a company to become a market leader in that category. Growth comes from dominating a very small market and then partnering with other developers to create the next MVS in an adjacent space.
3. Fund transformation
Providing appropriate resources to the activities in each zone on the two horizons is imperative. Too often companies fail at transformation because they don’t invest the right amount of money for the appropriate amount of time. They short-change the scale-up and business transformation, funding it like incubation. Achieving results with an innovation is only the beginning of the journey.
Watch this video from the EY Innovation Realized summit to hear business leaders answering the question: how to defend and protect your business of today while positioning for growth tomorrow?
Success factors for transformative innovation
The advent of exponential change creates new levels of opportunity, risk and uncertainty.
But one thing is sure — doing more of the same is no longer adequate. Here are some success factors and steps you can take now to position your innovation to catch the wave appearing on the next horizon:
- The future-back and out-side in transformation approach should be a top priority for the entire C-suite, not just the chief innovation officer.
- Establish innovation processes that work backwards from the future and then into a clear path to achieving your objectives today.
- Start small, picking a single use case for transformation — one market, one customer segment or one offering — to hone those processes.
- Create different governance and measurement for performance and innovation clearly aligned to driving the business of today and building the business of tomorrow.
- Track customer and market reactions to innovation programs in real time to rapidly shift into full transformation funding and scale as soon as market conditions are right.
- Manage innovation investments with small and fast tests to limit financial risks up front from early or failed programs and equally ramp funding quickly when market readiness is clear.
The scale of digital change — and accompanying opportunity — is fast becoming exponential. For companies, exponential change presents both an unprecedented growth opportunity and a risk of being left far behind. Harnessing exponential growth opportunities and avoiding disruption requires innovation that can keep up with the new pace of change.