Harvard Business Review
by Mark Bonchek
Digital business models are a bit of a misnomer. It’s not digital technology that defines them; it’s their ability to create exponential value. The music and video industries, for example, weren’t redefined by converting analog to digital formats. Just ask Sony about Minidisc players and Netflix about their DVD business.
To create exponential value, it’s imperative to first create an exponential mindset. The incremental mindset focuses on making something better, while the exponential mindset is makes something different. Incremental is satisfied with 10%. Exponential is out for 10X.
In the last century, industrial business models were defined by their use of machines to create increasing returns to scale. Digital business models use network effects to create what Ray Kurzweil describes as accelerating returns to scale. The key difference is that industrial models are linear while digital models are exponential, as shown in the chart below.
While others have written about how to design exponential strategies and organizations, I want to focus here on how to create an exponential mindset. My work with clients suggests that the incremental mindset is more deeply embedded than we might think. Unless you are conscious and diligent, you can end up with a strategy that looks digital (i.e. uses digital technology) but doesn’t actually operate digitally (i.e. achieves accelerating returns).
The role of incremental and exponential mindsets vary in each phase of the business journey: launch, grow, and expand………
To summarize, digital business models require a shift from incremental to exponential. At the start, it takes vision and a leap of faith to commit to the unknown. In the early days, it takes courage and patience to build the foundation for growth even when results aren’t yet apparent. When growth kicks in, agility comes from empowering others and letting go without losing control. In all of the stages, the challenge is to “unlearn” familiar ways of thinking and embrace the unfamiliar. But with a shift from the incremental to exponential mindset comes the opportunity for real innovation.
