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Chapter 2 | Thinking for a Digital Era Guidebook

Exponential Thinking: From 10% to 10x

Discover how network effects drive exponential growth and a new model for leadership.

Thanks to digital technology, change has become exponential. Business leaders need new tools, new skills and most importantly new thinking.

Incremental vs. exponential

Exponential thinking means shifting your mental model of change.

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.

Exponential thinking is hard for humans

Our brains evolved in an incremental world.

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.

Digital technology is making our world exponential

The technologies of the industrial age were incremental, but digital technologies are exponential.

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.

You may have heard of Moore’s law about exponential increases in capacity for computer processors—for decades, processor speeds doubled and prices halved every year.

A similar pattern often holds true for technologies like storage, bandwidth, IoT sensors, artificial intelligence, blockchain and genomics.

But what does that mean for organizations and leaders?

Technology alone won’t get 10x results

Without exponential thinking, digital technology can only deliver incremental results.

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.

Exponential Technology X Incremental Thinking = Incremental Results

Exponential technologies like social networks and artificial intelligence are only as good as the thinking we apply to them. Think of digital transformation like an equation. If we have an exponential technology but multiply it only by incremental thinking, we'll get an incremental result. For example, the first thing people did with the Gutenberg press was print more bibles. The first thing we did with the world wide web was send more memos and publish more advertisements.

If we have incremental thinking and we multiply it by exponential thinking, we'll still get incremental results. Someone could have imagined a world with an explosion of publishing and learning, but if books were still scribed by hand, the 'technology' of books was still too limited to generate a truly exponential result. People did imagine the internet of today many, many decades before it happened—but the technology wasn't ready yet.

When we multiply exponential thinking by exponential technologies, we get exponential results. When people had both the exponential idea of 'publishing' and the technology printing press, we then got a publishing revolution—an exponential result. When we had both the exponential idea of 'online social networks' and the exponential technology of the social internet, we got Twitter and Facebook.

Example

Nupedia and Wikipedia

It takes exponential thinking to deliver exponential 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 18,000 articles in the first year.

Network effects drive 10x change

The key is unleashing network effects.

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.

“Kids Building Tall Tower with Kapla Blocks”

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.

“Guinness World Record - Most dominoes toppled in a spiral”

Sometimes we try to transform large systems as if they were a row of perfectly-aligned dominoes, hoping we can change everything in perfect synchronicity. But real life rarely works this way.

“Exponential Growth”

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 connect one-to-one or one-to-many, ping pong balls generate a network effect because their pattern of connection is non-linear and many-to-many.

Examples of Network Effects

We can look to history or more recent events for examples of network effects. Train systems weren't very useful until they had a network of stops—and each stop added to the system meant an exponential increase in the utility of that network. Similarly, telephone systems seemed like a novelty until suddenly they were transformative—again, because of the exponentially-increasing value of that network as more nodes (phones) were added to it. Google increased in value exponentially as more data points got added to it, which meant more accurate search results. Facebook was only useful for university students in its early days, where Facebook had a well-populated network—it wasn't until almost a decade later that most Americans were on it (54% in 2012, 69% in 2019).

Example

Google Maps / Waze

Two different exponential strategies for navigation.

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, a passive source of data. That enables them to know where the traffic is in real time. Google Maps is what people use to navigate in unknown circumstances.

By contrast, Waze focuses on creating a network effect between drivers. Waze has cultivated a community where people share what they are seeing as they are driving, so much so that they use Waze to report on their daily commutes, not just to navigate to new destinations.

With Google Maps, devices do the reporting; with Waze, it’s people. They offer different kinds of value, and many people use both.

Example

Uber / Airbnb

Most people don’t realize that the source of their growth comes from a network effect.

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.

Incremental vs. exponential leadership

Exponential thinking requires a new mindset about what leadership looks like.

The exponential model of leadership looks quite different than what we're used to. It’s not about hierarchal command and control, but rather about creating the conditions under which network effects can arise within your organization.

Ambidexterity: Being Able to Switch Back and Forth

Unlearning as a capability is not just about replacing obsolete mental models, but also switching between several viable models. For example, there are many places where 'incremental thinking' is useful such as process improvement, optimization, safety, and cost reduction. There are other contexts where exponential thinking is desirable—when we're creating new value, solving seemingly intractable problems, or launching new communities and markets. You can think of the ability to switch between two or more useful models as ambidexterity. Just like it's helpful (and rare) to be able to use both our right hand and our left hand equally well, people and organizations who can operate in many different mental models are resilient and valuable.

Fall, don’t fail

Learn to fall without failing.

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,” meaning 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 learn how 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 wants to fail. But learning how to fall well is an important part of transformational learning.

Skills for exponential leadership

Being an exponential leader means developing new skills, not working 10x harder and running 10x faster.

Exponential leadership requires a new focus. It’s not about what and whom you control, but what and whom you empower.

Exponential leadership also requires a new skillset. Incremental leaders make tradeoffs and choose between competing objectives. Exponential leaders transcend these tradeoffs with new skills to replace “or” with “and.”

Unlearn mental models. Exponential leaders listen for the language their teams are using to identify outdated mental models.

They design more effective mental models and help others make the leap from the old to the new.

Be ambidextrous. Exponential leaders move nimbly back and forth between incremental and exponential thinking, and help others use the right mindset, methods and metrics for the task at hand.

Learn to let go without losing control. Incremental leaders alternate between using tight control to achieve consistency and alignment, then delegating to achieve agility and autonomy. By designing Decision Principles, exponential leaders transcend this tradeoff to achieve both alignment and agility.

Fall without failing. Incremental leaders avoid falling at all costs, while exponential leaders find ways to avoid high-stakes failures by practicing falling under less risky conditions.

Leverage diverse thinking. Incremental leaders often assemble teams that mirror their own strengths. Exponential leaders foster collaboration by assembling teams with diverse Thinking Styles.

Exercise

Fall, don’t fail

Think about a situation where you need to find your edge. Consider what different types of failure might look like, and how
you might fall without failing.

  • Find your edge What’s a situation where you need to practice falling?
  • Ways to fail How might you not risk anything
    so you never fall at all? How might you fall without learning anything from it? How might you fall in a way that causes real harm?
  • Fall, don’t fail How could you accelerate learning to limit the downside, while keeping the upside?

Exercise

10x vision

Start fleshing out a vision for exponential innovation. Look at WHAT, WHO and HOW to actualize your vision.

WHAT:
- What do you see as possible?
- Where do you want to create exponential results?

WHO:
- Who could help you develop and refine this vision?
- Who are your thought partners?

HOW:
- How might this vision become a reality?
- What mindsets & toolsets do you need?

Recap

Discover how network effects drive exponential growth and a new model for leadership.

  • Exponential thinking is hard for humans. Our brains evolved in an incremental world.
  • The technologies of the Industrial Age were incremental, but digital technologies are exponential.
  • Without exponential thinking, digital technology can only deliver incremental results.
  • The key to going exponential is unleashing network effects.
  • Exponential thinking requires a new mindset about what leadership looks like.
  • Being an exponential leader means developing new skills, not working 10x harder and running 10x faster.