How To Achieve Balanced Innovation With The Hourglass Model
It was founded in 1949 in Minneapolis and created the first battery powered pacemaker. Before that, cardiac patients could already be treated with electrical stimulation, but needed to be connected to the power grid. During a massive power outage over Halloween in 1957, large portions of Minnesota and Wisconsin lost electricity, resulting in the death of several cardiac patients. This triggered Medtronic’s founder Earl Bakken to develop the first battery-powered, transistorized and wearable artificial pacemaker.
Over the years, the company has grown massively and it is constantly looking for their ‘Day After Tomorrow’ strategy. Especially in the fast-changing world of healthcare – where big data, sensors and mobiles are transforming the name of the game – it cannot afford to keep its horizon limited to “Tomorrow”. The best example of how Medtronic is transforming its market, is the Micra, the world’s smallest pacemaker which has disrupted the traditional technology by applying leadless pacing.
I had become friends with Emile when ‘The New Normal’ came out, and we would regularly exchange ideas about the latest evolutions in healthcare. When he started applying my Day After Tomorrow concept in his own business, the challenge was to structure IT resources according to the model’s three buckets: 70% for Today, 20% for Tomorrow and 10% for the Day After Tomorrow. A significant part of his team was managing the legacy, implementing large scale IT systems like SAP to ‘run’ the business. A company like Medtronic, which has more than $30 billion in annual revenue, must ensure that these systems run like Swiss clockwork. This meant that the majority of the budget, and his people, were managing the ‘Today’ thinking, and spending a lot of effort in cleaning up the “Shit of Yesterday”. No surprise that, when they did think of Tomorrow, it was almost always by extrapolating the current strategic framework.
At the same time, Emile realized that the world of healthcare was on the verge of a set of massive disruptive changes, moving towards a highly personalized form of medicine. The world of pacemakers could transform from a world of electronics into a world where data and digital platforms would become extremely important.
Gradually Emile started to align the two parts of his strategic framework – the existing and the emerging business – and began to allocate more and more efforts, budget and resources to the Day After Tomorrow. The metaphor that slowly emerged from this was that of the Hourglass.
I’m not sure how long it’s been since you picked one up, but we all know that an hourglass has two parts. The TOP part of the hourglass is where the sand flows gradually downwards, through the middle section, slowly filling up the BOTTOM part.
If we apply this model to our strategic thinking process, the TOP part is composed of SENSE and TRY.
The SENSE element of the hourglass model is our radar screen for all things new and exciting: new ideas, technologies, models, concepts, developments, you name it. In short, a way to spot “those bits of the future that have already arrived”, to quote William Gibson.
We are experiencing the Never Normal, one of the fastest changing times in modern history. It is fired up by the non-linear dynamics of the network and a series of permanently interacting novelties. Basically, we need a better radar screen, a wider field of vision, and a deeper sensing network to keep up. We all need to be more alert, pick up signals faster – however weak and feeble they are – and continue to develop and sharpen our sensors for the next new things. Star Trek’s The Enterprise sported a ‘long range sensor scan’, with which it could detect incoming starships long before they would show up on the visual monitors. That’s the kind of technique that companies have to learn and develop. It’s not enough anymore to attend the annual conference in your field to keep up to date. You have to scan for developments outside of your normal field of vision, understand adjacencies, developments in other sectors, and be extremely open minded for opportunities and serendipity.
The second element of the top part of the hourglass is the TRY segment. Once you have identified ingredients for change in your ‘Sense’ section, you need to experiment with them and create an environment where you can test ideas fast and safely. Startups have this modus operandi built in in the most natural manner. They are notoriously good at implementing lean methods of experimentation, building Minimum Viable Products, and testing those with users.
Eric Ries was a young Silicon Valley engineer, who had experienced firsthand how tight budgets forced startups to work in a certain way. They ‘naturally’ applied a method of lean development, testing alternate versions of a product with users to get early feedback, and learning from those findings how to quickly iterate to improve the product. It’s quite simple: a startup has no alternative. They are in a constant race against the clock, permanently in fear of running out of cash before they hit sustainable revenue. Large corporations, on the other hand, do have that luxury, unfortunately. I say unfortunately, because the sad result is that whatever is being developed is often too late, and off the mark.
When Ries started working in Venture Capital, and advising many startups, he decided to write up his findings into his seminal book “The Lean Startup”. It became an instant bestseller and has been widely adopted, not just in the startup world, but in many traditional organizations as well. The core element of Ries’ method is to accelerate the feedback loop.
When startups build a product, they build a Minimum Viable Product or ‘MVP’. The difference between a ‘normal’ product and an MVP is basically that the latter is just ‘good enough’ to be tested. A Viable product is the product that you would LOVE to build (and that’s probably being developed by companies that are much better financed than you). A Minimum product, on the other hand, is an underwhelming – yes, maybe even ‘crappy’ – version of the concept that you want to test. It’s in fact so bad that nobody would want to actually use it. The intersection of the two, the Minimum Viable Product, is the best possible version you can build for testing with early users: one that will bring you enough valuable input for your next iteration cycle.
According to Ries, this cycle is quite simple: Build, Measure, Learn, and then Start over. When you have built your MVP, you launch it and gather as much user feedback as you can. You then analyze these findings and deduct key learnings. That input should give you directions on how to quickly develop the next version of your product. And then you start right over.
Only once you have gone through a number of cycles of your ‘lean startup’ routine, can you start fully developing your software or products. This approach has been widely adopted since first proposed, and just as much by corporates as by startups. It’s also often used in combination with Design Thinking, which can help better understand and serve customers and help define the MVP’s initial set of requirements.
This ‘TRY’ segment of the hourglass can be an extremely powerful mechanism to experiment in a Lean fashion. With techniques borrowed from the startup world, companies can set up shop to test, decide what works, and then adapt or move forward.
Scale & Run
And so we have arrived at the lower section of the hourglass, where we can ‘SCALE’ and ‘RUN’. It’s not hard to understand why this part tends to be best developed by successful traditional companies. This is where companies decide what is REALLY worth putting their money into by narrowing the concepts, ideas and projects of the experimentation phase through the bottle-neck between the top and lower half of the hourglass.
When a concept, a project or an idea has percolated through the top of the hourglass, and is considered likely to be a success, it needs to be SCALED out throughout the organization as quickly as possible. After that, it is crucial to RUN the operations as smoothly, efficiently and reliably as possible.
One could apply the hourglass model for the very specific function of the Information Technology department, but some companies might have an appetite to use the hourglass model on their entire strategic portfolio.
Top To Bottom
When Google rebranded itself as ‘Alphabet’ in October of 2015, it seemed like a strange move for a company that had conquered the ‘search’ market so incredibly fast. They had not been the first mover in that field, though. It is relatively easy to conquer a market with a brand-new offering when you’re the first, but in the search business, companies like Yahoo and Altavista had been around for quite some time. And Google killed them almost overnight.
But that was the past. Google knew it had to keep vigilant not to fall into the same trap of ‘Kodak’ or ‘Xerox’ and maybe even General Motors or General Electric: leaders that were once synonymous with a market, only to come crashing down after failing to reinvent themselves. As Google grew, it became clear to them that it was not easy to keep on innovating from the core, and they were terrified of turning obsolete in the same way their former competitors had.
Alphabet turned out to be much more than a cosmetic name-change. It was an elaborate exercise in strategic horizon planning. The high-growth, high-profit elements of the company (including search, YouTube and Android) became part of the ‘core’ offering of Alphabet: responsible for generating the lion’s share of revenue, cash-flow and profit. In 2017, for example, 86% of Alphabet’s revenue still came from search-related advertising. But next to this ‘core’, Alphabet made quite a few ‘Bets’, including Nest for home automation, Verily for their Healthcare activities or Waymo that handles the business of autonomous cars. And let’s not forget the infamous ‘Google X’ lab, the most famous ‘Bet’-factory of all.
When you look at this from an Hourglass model perspective, Alphabet’s ‘Bets’ include daring concepts like connected contact-lenses or driverless cars. Alphabet recognized that these experimental ideas would NEVER survive if they were tried and tested inside their ‘CORE’ business.
Zero To One & One To N
One of the rawest accounts of the startup universe has to be the brilliant book ‘Zero to One’ by Peter Thiel. Thiel co-founded Paypal with Elon Musk, and has evolved to become one of the most influential investors in Silicon Valley. Based on his experience of running, and investing in startups, he taught a number of classes at Stanford and eventually turned this material into ‘Zero to One’. Its premise is that creating Something from Nothing – zero to one – is the essence of a startup.
I would argue that this same dynamic is also the essence of the TOP part of the hourglass. They’re both about focusing a wide lens onto disruptions and opportunities, prioritizing, selecting, and then experimenting and testing. They perfectly match, just up to the point when a ‘golden nugget’ appears, which you then have to drop into the BOTTOM part of the hourglass. We can call this second part of the process ‘One to N’. This is where you scale and grow (going from one thing, to many) the business in the most effective way possible.
Very often the ‘SCALE’ part tends to reside in a project mode, with scores of nervous project managers trying to roll out brand-new concepts into the organization. The ‘RUN’ part, in its turn, is the beating operational heart of the organization: it’s where we strive for bottom line results and apply traditional management techniques and Key Performance Indicators to achieve success.
One of my favorite quotes, attributed to Nelson Mandela is this one: “I never fail, I either win or learn.” For me, that is the true essence of learning from our mistakes. We all know ‘Fail Fast, Fail often’, a common mantra in the startup scene. Of course, the whole idea behind “fail fast, fail often,” is not to fail, but to be iterative in how you learn.
A LAT Relationship
The top part of the hourglass model – the Day After Tomorrow section – consists of being open for new things, failing fast and learning, and creating more clarity about where you need to place your bets. The bottom part is about producing the scale and bottom line as the foundation of your business. That’s your Today, and your Tomorrow.
I have observed how Emile Piters gradually but very decidedly shifted his organization towards the hourglass model. First, he made sure that his IT spending was pushed significantly towards the TOP part: it evolved from 5% at the top, and 95% at the bottom, to a situation where it’s trending towards a 30/70 ratio. But he also knew that it was not just about moving funding from the bottom to the top: the two parts of the hourglass required different skills, mentalities, cultures and leadership. And they had to be organized, managed and controlled in different ways. Above all, they had to be CONNECTED. They basically needed a perfect LAT (Living Apart Together) relationship. So Emile installed a mindset throughout the organization where the TOP part of the hourglass was fully aware that they could not fulfill their potential without the Bottom part of the hourglass, which generated the necessary funds, cashflow and scale. And the BOTTOM part of the hourglass had to be fully committed to the top part of the hourglass, and convinced that it was vital for remaining relevant in the Day After Tomorrow. Both parts were (and still are) interdependent to stay essential and relevant for the future.
I have observed many companies that have a brilliant bottom part of the hourglass, but were unable to create the top part that would allow them to remain future-proof. But I have equally seen many companies that did develop that latter capability, but were unable to get the top and bottom parts of the hourglass to align and create common objectives. Only if you manage to properly connect and align the zero-to-one AND the one-to-n will you have a solid formula for tackling your Day After Tomorrow.
I believe this could be the ideal recipe for the Phoenix (corporate companies that know how to reinvent themselves on a permanent level to keep up with these fast-moving times - and also the subject of my upcoming book, 'The Phoenix and the Unicorn', which will be available as of March 2020): a mechanism to keep an open mind, understand new opportunities, and the possibility to bring innovations from idea to scale in a continuous process.