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Why outdated companies are falling behind the start-ups

Technology is changing our lives at an unprecedented pace. We're shopping on our phones, watching Netflix on our tablets and posting selfies to Instagram.

From a business perspective, technology is forcing a new approach. The massive, grindingly slow corporates of old, the likes of Blackberry, Blockbusters, Nokia, Navteq and Kodak, are being superseded by two guys in a garage with a start-up leveraging new, innovative technologies. Welcome WhatsApp, Oculus Rift, Twitch, Netflix, Instagram, Waze and Xiaomi.

The adoption of technology by consumers is hugely faster than organisations, but what does this mean for the future of large organisations? How do technology brands need to adapt their business models to survive in this rapidly evolving environment?

Ultimately, organisations that are better adapted to a dynamic and complex environment are in a stronger position. These are Exponential Organisations instead of classic, linear ones. For these companies, speed, learning, unlearning and flexibility will become more important.

At a structural level, hierarchies will transform into networks and companies will become more open. Centralised top down systems will be replaced by decentralised solutions and systems, and ownership will be increasingly substituted by access.

We call these Exponential Organisations instead of Linear ones.

Not only will there be radical changes in strategy, organisational structure and systems and processes, but also in people, KPI's and culture. While start-ups are able embrace these changes without any legacy, inertia or sunk costs, larger and older organisations tend to find themselves trapped in their previous successes and outdated business models.

In practical terms, start-ups are changing business culture:

  • KPI's and goals are fully open and transparent to all employees, which in turn is depolarising the company
  • Employees are able to self-select projects or even create new ones with less, or even no, top down approval
  • Self organising teams and decentralised authority for individual employees is the standard
  • The use of short feedback cycles and goals have a motivating impact for employees and teams
  • Social technologies are woven into all corners of the organization, using activity streams, file sharing, wikis, task management and even teleprescence robots
  • Curiosity is supported by embracing experimentation Employees and partners are proud to be a part of an organisation due to its higher purpose – how its products are creating a better world in ecological, health and/or social terms.

It is very hard for large organisations to re-organise themselves and compete in this new exponential era. Most fail, and only a handful will succeed.

For example, the likes of Google, GE, Haier and Coca Cola have been able to adapt. Haier from China had 80,000 employees in 2005 and it was too rigid killing innovation. At this point, the management team decided to create 2,000 individual start-ups in their own organisation, stripping out the middle management.

These 2,000 start-ups had decentralised authority and self organising teams with a customer focus. In the last three years the company went from $20 billion (£12.5bn) to $60 billion (£39bn) market cap due its radical new organisational model.

In conclusion, start-ups will continue to disrupt the older and larger organisations. The key reason is that older organisations kill corporate innovation themselves due to internal politics and the focus on shareholder value.

For example, why didn't Blockbuster create its own Netflix a long time ago? Because it would have impacted its top- and bottom-line in a negative way at first, and ultimately disturbed its cash cow.

Shareholders would not have appreciated this, as they have a short-term view. It would have also killed the bonuses of the executive team and directors. Additionally, risk taking and failure is a career-limiting move in most large companies. So what happens is that real radical innovation or disruption is avoided, and only incremental innovation is allowed.

That is why the old guard is being replaced by the new.

Yuri van Geest is co-author of 'Exponential Companies: Why new Organisations are ten times Better, Faster and Cheaper than yours' and will be speaking at The Singularity Summit in Amsterdam on the 19th-20th November