COPENHAGEN BUSINESS SCHOOL 2016CAND.MERC./MSC EBA INTERNATIONAL MARKETINGAND MANAGEMENTMASTER’S THESISExponential growth is a shortterm transient phenomenonAn assessment of the idea of exponentialorganizationsSupervisor: Søren Henning JensenDate of submission: 17.05.2016Name: Hanna Kristina Elisabeth JülligNo. pages: 73No. characters: 171 1561

AbstractThe purpose of this thesis is to assess if a company can achieve and maintain exponentialgrowth by applying an organizational design that allows the company to leverageinformation-based technologies and outsourcing.The bold promise of the possibility to achieve and maintain exponential growth hastempted and will continue to tempt business executives, entrepreneurs and visionaries tobelieve that such growth can be possible. However, a master student at CopenhagenBusiness School can conclude that it is impossible to achieve and maintain exponentialgrowth for companies in any industry, due to the absolute limits of the finite system of theearth as well as limitations embedded within the company itself.However, dismissing the unachievable promise of exponential growth, the organizationaldesign can present insights about intra- and inter-firm knowledge sharing. Nevertheless, thedisconnect lies in the fact that while parts of the organizational design are beneficial forintra- and inter-firm knowledge sharing and application, it does not guarantee exponentialgrowth in any sense.2

Table of ContentsIntroduction . 4Problem statement . 6Structure. 8Research approach . 8Research philosophy . 9The reality in which the researcher lives . 14Reasoning approach . 16Research design. 17Data collection method . 18To achieve and maintain exponential growth. 20What does exponential growth entail? External limitations to exponential growth . 20Summary . 27The organizational design proposed by Ismail . 28Massive transformative purpose . 29Externalities; SCALE . 29Internal mechanisms; IDEAS . 34The end of Moore’s Law. 38Summary . 44Outsourcing does not entail flexibility and minimized costs . 45Summary . 55Internal limitations will limit the rate of growth . 56Summary . 64A company cannot achieve nor maintain exponential growth by applying the organizationaldesign proposed by Ismail. 65Critique on the research method of Exponential Organizations . 66What can be gained from reading Exponential Organizations? . 69Conclusion . 723

IntroductionWhen public companies report high growth rates, it in general results in investors wantingto buy stocks, thus increasing the stock price. On the contrary, evidence for decay result instockowners wanting to sell their stocks, hence decreasing the stock price. Marketcapitalization numbers can thus be argued to correlate with companies’ growth rates. On aglobal, digital market, it is possible to grow internationally and thus further increase growthrates. However, growing internationally at high speed is not something achieved overnight.Companies, no matter the size, are struggling to find the right growth strategies, businessmodels, and organizational design most suitable to international, rapid growth. If ablueprint for rapid, international growth existed, a majority of contemporary companieswould indeed adapt their businesses according to it.However, differences in ability to grow rapidly on the global market seem to exist. Airbnband Uber are two examples of companies that have made an impact on two specific marketsin several countries around the globe lately, and that have grown rapidly. Salim Ismail, astartup guru and former Yahoo employee, wanted to investigate why some companies areable to achieve rapid, international growth and some not. It led to the publication of thebook Exponential Organizations in 2014. Based on the assumption that performance is keyin business, and growth is decisive for performance, Ismail states that the incremental,linear way of which traditional companies get bigger can be disrupted by a fundamentalchange of the nature of the organization. By applying the right organizational design,companies are able to grow in a radical, exponential way and therefore outperformcompanies that are growing linearly.In Exponential Organizations, Ismail presents a new way of designing organizationsthrough which it is possible to achieve and maintain international, exponential growth. Yes,exponential growth, where every step of the growth process is bigger than all the previoussteps combined. If we assume growth rates and market capitalization numbers to correlate,imagine the development of your company’s market capitalization number if your businessgrew exponentially. Your reports would show analysts that your business is doubling, and4

is doing so frequently, thus presenting fantastic growth rates. We know that fantasticgrowth rates in general means that investors will want to buy stocks, and a lot of them.Thus, the stock price will soar and obviously your market capitalization numbers as well.Talk about a powerful blueprint for international growth.Consequently, I wonder how is it possible that a particular organizational design enablecompanies to achieve and maintain exponential growth. Ismail explains that it is possible toachieve and maintain exponential output due to the use of information-based technologiesthat have become accessible to the public due to an exponential price performancedevelopment. Furthermore, the democratized information-based technologies allowscompanies to leverage external resources to achieve their objectives, and thus accomplish ascalability that no traditional organization can achieve and maintain. Hence, informationbased technologies following Moore’s Law and the transfer of major business functionsoutside of the organization are two fundamental drivers that will enable companies toachieve and maintain exponential growth. They are fundamental since all internallimitations to growth will be overcome, and thus Ismail argues that any company canachieve and maintain exponential growth by applying his organizational design andsimultaneously leveraging technologies. Therefore, the author concludes that a companycan grow exponentially and maintain such growth by applying the proposed organizationaldesign.So what are the advantages of applying Ismail’s blueprint for international growth? Theauthor argues that it allows companies to become ten times better, faster, and cheaper thanthe average company. Most importantly though, exponentially growth will be achieved andmaintained. Thus, Ismail claims to have created an organizational design that enables fastergrowth than any other known organizational design. The purpose of this thesis is toexamine Ismail’s claim and thus simultaneously assess whether the proposed organizationaldesign can act as a universal blueprint for international growth.The research question of this thesis will therefore be:5

Can a company achieve and maintain exponential growth by applying theorganizational design proposed by Ismail in Exponential Organizations?In the following pages constituting my thesis, I will answer this question. It is not an easytask and it will require me to disclose some facts concerning my private person, beyondbeing an academic researcher. The process of searching for the answer will be as importantas the answers themselves, and I will therefore be transparent with all of its stages, whichwill be elaborated upon in a problem statement.Problem statementExcept promising better, faster, and cheaper organizations as well as exponential growth,why ought we to listen to Ismail? Exponential Organizations was the winner of Frost &Sullivan’s 2014 Growth, Innovation, and Leadership Book of the Year, and was chosen byBenjamin Netanyahu, Prime Minister of Israel, to be one of Bloomberg’s Best Books of2015. Moreover, Ismail has digital and startup experience from being a vice presidentYahoo, from building and running incubators, and from being an entrepreneur whom soldoff a company to Google (Ismail, 2014). The book has thus gotten attention from the worldof business, and it can be argued that Ismail knows what he is talking about. First, due tohis experience from working at a company which business model is based on informationtechnologies. Second, due to his experience from being an enabler for growth for startups,which tend to grow more rapidly than large companies do. Furthermore, Ismail did spendthree years researching for this book, witnessing of extensive research to substantiate hisstatement of the ability to achieve and maintain exponential growth.However, when observing the business landscape, it is difficult to find any examples ofcompanies that managed to achieve and maintain exponential growth. Moreover, businessschools are not teaching this particular organizational design at all. The lack of practicalevidence and academic acknowledgement is making me suspicious of Ismail’s growthblueprint. Is the concept of exponentially growing companies flawed?To be able to assess the research question of this thesis, it is necessary to dissect theconclusion Ismail arrived at during his research for Exponential Organizations. As6

mentioned on the previous page, the conclusion states that a company can growexponentially and maintain such growth by applying the organizational design proposed byIsmail. The author claims to have used a deductive research approach to arrive at hisconclusion, and therefore the argument will be treated accordingly.In deductive reasoning, a conclusion inevitably follows from the premises presented, andtherefore the conclusion will be true if the premises are true. Ismail’s conclusion cannot befalse, since it follows from three premises that he argues to be true. First, the continuity ofMoore's Law will improve the price performance relationship of information-basedtechnologies and hence enable any company to leverage technologies in order to achieveand maintain exponential output. Second, the democratized technologies enable companiesto leverage outsourcing, allowing enormous flexibility and minimized costs sinceexponentially growing companies can maintain a very small core of employees and assetswhile growing. Third, there will be no internal limitations to grow exponentially andmaintain that growth for companies applying the organizational design and simultaneouslyleveraging technologies. One by one, I will investigate whether these premises are true. Ifthe premises are true, I can conclude that Ismail’s conclusion is true. However, if evidencepoint to the fact that Moore’s Law will not continue, the price performance relationship oftechnologies will not improve and thus not enable every company to leverage technologiesto achieve exponential output. Similarly, if evidence point to the fact that outsourcing doesnot result in flexibility and minimized costs for exponentially growing companies, thesecompanies cannot maintain a very small core of employees and assets while growing.Correspondingly, if evidence point to the fact that technologies does not continue tobecome democratized and therefore does not allow exponentially growing companies tomaintain a small core of employees and assets, internal limitations to growth will limit therate of growth. If this is the case, a company cannot achieve and maintain exponentialgrowth by applying Ismail’s organizational design.7

StructureThe thesis is organized as follows. The next section will introduce the reader to the researchapproach and research design adopted to answer if a company can achieve and maintainexponential growth by applying the organizational design proposed by Ismail. Archivalresearch of the collective knowledge of my community will enable a deductive analysis inorder to be able to answer the research question. The following section provides acomprehensive analysis of exponential growth of companies to enable a conclusion onwhether such growth can be achieve and maintained. Each part of the analysis issummarized and its implications discussed. A critique on the research method ofExponential Organizations is thereafter presented to the reader in order to reinforce anunderstanding of the results of the analysis. The following section presents an alternativeuse for the organizational design, dismissing the possibility to achieve and maintainexponential growth. The final section provides a summary and conclusion on theimpossibility to achieve and maintain exponential growth.Research approachIn order for me as a researcher to identify what factors will influence my research design, Ihave to develop a research approach that enables an appropriate assessment of my researchquestion. The factors influencing the research design will be the ontological belief thatreality is co-constructed by members of a community and that knowledge is a socially andculturally constructed human product. Hence, social factors in my environment, such asbeing a master student at a business school, will result in a research design particularlyrecommended for business students performing a theoretical analysis. I approach thisresearch by examining the collected knowledge of my community, and thus the reader willbe presented with deductive reasoning based on an archival study. The research approachsection will therefore introduce the reader to key elements of the attempt to answer theresearch question of this thesis, and explain what will be measured and how it ought to beinterpreted.8

First, a set of assumptions regarding reality and knowledge will be agreed upon whendeveloping the philosophical perspective of this research in the following paragraphs. Thisis an important basis for the research, since the choice of assessing the research questionthrough archival research resulted from the assumption that members of my community andI collectively create reality and knowledge. Furthermore, this thesis will develop newknowledge about a newly introduced organizational design, and therefore aspectsinfluencing this knowledge creation will be discussed.Research philosophyIn order to be able to answer the question of ‘Why research?’ it is necessary to develop aphilosophical perspective. Core assumptions regarding reality and knowledge willelaborated upon, as such assumptions are decisive in my approach to answer the researchquestion. As previously mentioned, I have chosen to elaborate on the perspective of socialconstructivism as the philosophical framework for this thesis. This section will thus presentto the reader how I view the world and how I understand what I am investigating.In 1966, Berger and Luckmann introduced the term social constructivism to social sciencesand argued that reality is socially constructed. This is due to the embeddedness ofknowledge and people’s apprehension as well as supposition of what reality is in theinstitutional fabric of society. Meaning is embedded in society due to the process of theinstitutionalization of reciprocal interactions between members of society. (Berger &Luckmann, 1966) More simply put, social constructivists argue that reality is constructedby our own activity and that we collectively invent the world rather than discover it (Kukla,2013). The next paragraph will inform the reader on the nature of reality, and thus myassumptions about the way the world operates.The ontological assumption of social constructivists is that social objects are not given inthe world, “/ / but they are constructed, negotiated, managed, reformed, exchanged, andorganized by human beings trying to make sense of what is happening around them.”(Kelemen & Rumens, 2008, p. 31). Furthermore, reality is assumed to be constructedthrough human activity by the members of a group whom together invent the properties ofthe world (Kukla, 2013). When applying the social constructivist philosophy, we thus9

assume that reality cannot be discovered since it does not exist prior to its social invention(Kim, 2001). As a researcher I hence see the world as socially co-constructed by theparticipants in my environment, call it my community. Therefore, I assume that socialobjects, such as organizations, are constructed, negotiated, and managed by human beings,such as myself, as we are trying to make sense of what is happening around us. As such,contemporary organizations are constructed and negotiated while we are trying to grasp therapidly changing and increasingly international market place. Organizations are accordingto Saunders, Lewis and Thornhill (2009) thus created from the perceptions and consequentactions of social actors in a continual process of constant state of revision. In summary, Ifind it necessary to study the details and circumstances of the situation in which companiesare claimed to be able to grow exponentially, since it is difficult to find any exponentiallygrowing companies in my reality. The next paragraph will discuss what is consideredacceptable knowledge.The complexity of the business and management world calls for an emphasis on socialactors and the meaning we give our everyday social roles as well as how we interpret theseroles (Saunders et al., 2009). Therefore, I will adopt an empathetic stance and enter thesocial world of the research subjects in order to develop knowledge. Saunders et al. (2009)argue that an empathetic stance is highly appropriate when conducting business andmanagement research, especially in such fields as organizational behavior and architecturewhere social actors are prominent indeed. Following the ontological assumption of socialconstructivism, there is an epistemological relativism about beliefs and knowledge. “This isthe view that there is no absolute warrant for any belief- the rational warrant makes senseonly relative to a culture, or an individual, or a paradigm.” (Kukla, 2013, p. 4). Thus,knowledge is considered a human product that is socially and culturally constructed.Further elaborated, knowledge is created through individuals’ interactions with each otherand with the environment in which they live, and hence learning is viewed as a socialprocess (Kim, 2006). Furthermore, intersubjectivity among individuals in a communityplays an important role in the construction of knowledge. The intersubjectivity is formed bycultural and historical factors of the community, and influence the construction of10

knowledge in addition to human interaction (Gredler, 1997; Prawat & Floden, 1994).Hence, the knowledge that I will develop in this thesis will be influenced by interactionswith people in my community, such as my thesis supervisor and my family. Whendiscussing the topic of the thesis and my concerns with Exponential Organizations with mysupervisor and my family, their perspectives and arguments will prime my thinking. As anexample, if one of my family members whom is interested in technology makes me awareof the fact that Moore’s Law is about to end, I will look for literature on Moore’s Law toinvestigate whether this statement is true. Thereafter, I will discuss my findings with thatfamily member to further grasp the concepts and develop my argument. Thus, theknowledge I will develop in this theses will be influence by interactions with people in mycommunity. Furthermore, my cultural background and the history of my community willinfluence this knowledge development. Hereby, I am aware that Ismail’s culturalbackground and the history of his community influence the content of the book aboutExOs.My personal values play a role in all stages of the research process, and since I amconcerned with the results to be considered credible I will inform the reader of them. Mystudies at Copenhagen Business School (CBS) have made me aware of the importance ofbeing critical to newly introduced management literature, such as ExponentialOrganizations. Descriptive literature can be accepted as frameworks at best, but not astheory, which needs to be prescriptive. Descriptive management literature can often bebought at airports and tempt potential buyers with bold promises. Such books can beinspirational, but is considered an unsubstantiated opinion until hypotheses have beenscientifically tested and confirmed. Hence, my preconceptions about management literaturemade me look for evidence of Exponential Organizations being descriptive. As suchevidence was found in the first pages of the book, I chose not to consider it as a theory but aframework. Thereby, I wanted to test the framework in order to assess its validity. Thus, theresearch question developed into the question presented in this theses based on mypreconceptions, which in turn are formed by my interactions with my community.11

Furthermore, organizational design is an interest of mine, and personally I believe in flathierarchies and freedom with responsibility, perhaps due to my Swedish culturalbackground. Ismail promotes flat hierarchies as well, and therefore I chose to search forbenefits of reading Exponential Organizations, resulting in such a section. Moreover, I findorganizations such as Tesla and Uber very fascinating, and I purchase their services, but Ido not consider working there during the early stages of my career. Their business is smartand disruptive, I however have ethical considerations with how e.g. Uber treats their ondemand drivers. Hence, I had preconceptions before I started to read about theorganizational design proposed by Ismail, resulting in a negative attitude towards parts ofthe organizational design already from the start. Thus, I was suspicious of the idea ofexponential organizations from start, and therefore designed a research question to questionthe idea. In addition, I have been part of small organizations growing rapidly, andexperienced internal issues related to growth that consumed many resources. Hence, mypreconception is that there will always exist internal limitations to growth, and thus Ilooked for such limitations for exponential organizations, resulting in a section discussingthe matter. Nevertheless, I find it necessary indeed for corporations to adapt to the newnorm of digital transformation. Thereby, I am interested in management theories thatdiscuss the future of organizations. Thus, I chose to assess the idea of exponentialorganizations in order to gain new insights that I can discuss with my community. Byhaving this conversation, I want to ensure the reader that I am aware that all stages of theresearch process will be influenced by my values. The relevance of my values have alreadybeen demonstrated in my topic selection and choice of philosophical approach, and willcontinue to show throughout the paper.As previously mentioned, the social constructivist research philosophy emphasizes howmeanings and understandings are the result of social factors. When applying this lens,peoples’ beliefs can be explained by the intersubjective sharing of ideas in an establishedcommunity (McKinley, 2015). Hereby, the research process will consist of an assessmentof Ismail’s beliefs about a particular organizational design that he claims to be the onlyoption for corporations wanting to compete in the so called new economy. The social12

factors of Ismail’s community has led him to impose certain premises to his argument. Theauthor thereafter claims his conclusion applies universally. My ontological andepistemological assumption influence the way I think about the research process, and thusthe process will consist of an investigation from the perspective of my community. Theknowledge base of my community will hence be consulted when performing the analysisand will thus be decisive for the conclusion of this thesis. According to Kelemen andRumens (2008), the information available to the constructor, and her or his ability to handleit, is decisive for the attempt to make sense of the world. Thus, my view of the world andthe social phenomena within it will be limited to the information available to me. Similarly,I assume that the same holds for Ismail when he wrote ExOs. Therefore, a limitation withthis study will hence be the lack of knowledge from other established communities.Nevertheless, I will not try to impose my conclusion on any other community than my own.The methodological belief, in social constructivism is interpretation of phenomena byhaving a dialogue (Kelemen & Rumens, 2008). As an example, I will ask questionsthroughout the theses. The purpose of this is to enlighten the reader of my thoughtprocesses, but also to make the reader aware her own thoughts and preconceptions. Thethesis will therefore present the reader with an interpretation of Ismail’s internationalgrowth framework by me having a dialogue with the written knowledge bank of mycommunity. As previously discussed, this research is value bound, and hence I am a part ofwhat is being researched. As such, I cannot be separated from the research, which will besubjective to some extent. Due to my interdependence with the research, I have chosen topresent it with a personal language, but still in observation of academic standards. Apersonal language furthermore enables me to minimize the distance between the reader andme as a researcher. This thesis will therefore largely reflect my person, and thus provide thereader with an analysis reflecting my thought processes. Hence, the analysis will be basedon the collective knowledge of my community, but it will be presented in accordance withmy way of reasoning. According to Kelemen and Rumens (2008), a social constructivistresearch allows us to understand how meanings are constructed, and furthermore how thesemeanings are enacted in the behavior of participants of social worlds. My assessment of13

Ismail’s international growth framework will therefore contribute to the understanding ofwhy scholars and the majority of managers in my community have not adopted theorganizational design presented in Exponential Organizations.As with every research philosophy, the social constructivist approach to research iscriticized. The main critique concerns the lack of recognition of the materiality of the socialworld. This proposed materiality is argued to constrain and influence social meaning, aswell as the conditions of possibility. (Kelemen & Rumens, 2008) This critique isinteresting, since one can argue that material, such as scientific articles and books, willheavily influence and constrain my view of reality. Nevertheless, the material constraints ofsocial worlds is exactly what I find interesting to bring to light, since it can enable anunderstanding of why certain communities cannot understand each other. In summary, thesocial constructivist approach will provide me with a powerful tool in order to assess theproblem at hand and answer the research question.To conclude, I want to raise a discussion about organizational growth, but also about howour social interactions and environments mold us into perceiving the world around us in theway we do. I want you as a reader to start thinking about the things that has formed youinto the person you are, with your beliefs, values, and perception of the world. Furthermore,I intend to challenge you into understanding people with beliefs and values contradictory toyours. I am not saying that you ought to agree with them, just that you will gain theopportunity to understand why people have these belie

Exponential Organizations was the winner of Frost & Sullivan’s 2014 Growth, Innovation, and Leadership Book of the Year, and was chosen by Benjamin Netanyahu, Prime M