A Three-Box Solution to Managing Innovation

New Book: In The Three-Box Solution, Vijay Govindarajan adapts an ancient Hindu philosophy to balance a company's often competing realities of past, present, and future. The more we can plan for opportunity, the better the possibility of creating a successful future.
  • Author Interview

Strategy in a Box

Interview by Michael Blanding

Sometimes the simplest ideas are best.

Thirty-five years ago, Vijay Govindarajan was a newly minted accounting professor at Harvard Business School facing a mountain of student debt. Consulting seemed a good way to earn extra money, but he figured CEOs didn’t want to hear about accounting. “They like strategy,” he says.

So, before his first meeting with BF Goodrich, he literally sketched an idea consisting of three boxes on the back of an envelope, one each for past, present, and future, and made that the center of his strategy consulting. “I found I was good at it,” he says.

Govindarajan, known as “VG,” is now one of the top strategy consultants in the world, author of countless books and articles, recipient of piles of awards, and consultant to a quarter of Fortune 500 companies over the past few decades.

He has never written down the philosophy that started it all, however, until now. In the book The Three Box Solution: A Strategy for Leading Innovation, to be published April 26, Govindarajan lays out the three-box concept with deceptive simplicity, providing a framework for companies to organize strategy with an emphasis on developing future innovation.

“If it’s going to take five hours for someone to understand what you are saying, they will never use it,” he says. “When CEOs see this framework, they can immediately start asking, is something a Box 1 project or a Box 2 project? They can start improvising. It quickly galvanizes action.”

Just as important, it serves as a communication tool within the organization, creating a common language to prioritize projects.

The Hindu universe

The origins of the idea, says Govindarajan, go back to Hindu cosmology, which posits three gods: Vishnu, the preserver, Shiva, the destroyer, and Brahma, the creator. “According to Hindu scripture, none of these is any more important than the other two,” says Govindarajan. “It’s only through balanced action that humanity as we know it can be sustained.” In the Hindu universe, there is no beginning or end, only an endless circle in which life is constantly being created, preserved, and destroyed in order to create new life.

"I took something written in scripture 3,500 years ago, this idea of cyclical rhythmic activity, and repackaged it for companies.”

“I took something written in scripture 3,500 years ago, this idea of cyclical rhythmic activity, and repackaged it for companies”

Govindarajan starts with Box 3—the future—which means for a company the game-changing innovations that are going to transform its business for tomorrow. Since the future is essentially unknowable, leaders must do three things to create something new, he says. First, identify weak signals, or early warning indicators of change, in the marketplace—whether that means a new consumer trend, a regulatory change, or a new technology that might lead to something new.

Second, empower mavericks. “These are the crazy people in an organization—the organizational nightmares who can’t get along with anyone,” says Govindarajan. “But they are the ones on the fringes who are most likely to see something new.”

Finally, companies must test these new hypotheses with low-cost, low-risk bets (the “fail fast” of design thinking). He gives the example of Keurig coffee makers, which first introduced their technology for the office, learned lessons about the market, then created a smaller version for the home.

No matter how cool and innovative a new idea is, however, it’s impossible to pursue without allocating time, resources, and manpower within the company. That’s where Box 2, the past, comes in. This box is the toughest and most important to get right, says Govindarajan. It requires companies to identify businesses that might still be working but may not be relevant for the future. And then forget them.

“Today those are your strengths,” says Govindarajan. “But if you don’t forget them, it will create future weakness.”

Govindarajan uses the example of Microsoft, which has focused its strategy almost solely on Windows-based PCs at the expense of missing out on most of the big trends in the last two decades—digital music, social media, cloud computing, etc.—while competitors like Apple, Google, and Amazon cleaned up on those innovations.

'Shoot a rocket through the business'

There are two ways to identify and divest outdated businesses, says Govindarajan. The first is to set up a dedicated Box 3 team for innovation that is isolated from the rest of the business—either by recruiting people from outside or setting up different metrics or processes—so it doesn’t have to forget what it never learned.

“Suppose you find yourself in a situation where the problem cannot be isolated, however,” says Govindarajan. “Suppose the entire organization needs to forget?” In that case, the only solution, he says, is to “shoot a rocket through the business—you’ve got to pick a hot-button issue and make a stand.”

Take Mahindra, India’s leading heavy machinery business. When India’s protected economy was deregulated in 1993, opening it up to competition from multinational firms, new CEO Ananda Mahindra found that the waste and inefficiency in the company made it impossible to compete against the likes of John Deere. In response, he took the drastic measure of cancelling the bonus for Diwali (the biggest holiday in India), a deeply held tradition workers look forward to every year. The move was met with wide protests and even strikes, but Mahindra stood its ground, and eventually the message was received. The culture of the company changed and became more efficient.

While Boxes 2 and 3 may be the most difficult to address, it’s important not to lose sight of Box 1—managing the present business to keep the company going while you are forgetting the past and developing the future.

“That’s your cash cow,” says Govindarajan. “If Box 1 is weak, you can kiss Boxes 2 and 3 goodbye.” The trick to optimizing the present business, says Govindarajan is “variance reduction.” That is, analyze what works, develop a plan, and stick with it. “Keep manager’s feet to the fire and say any deviation from the plan will be punished,” he asserts. While that might sound draconian, it’s important to keep the core business sailing smoothly to provide the stability to innovate in other areas.

The key, of course, is balance—just as the three Hindu gods work in concert to keep the universe humming, a company manager must keep the present business strong and at the same time get rid of outdated enterprises and develop new lines. Govindarajan calls this process “planned opportunism.” Since the future is always unpredictable, it’s crucial that companies set structures and processes in place to take advantage of opportunities as they arise.

“Don’t focus on what the future will impose on you,” Govindarajan says, “focus on what you can do. In terms of talent acquisition, for example, you can not only acquire talent for today’s business, but also acquire talent for new business before you need it, or for new technologies—even if you don’t know exactly where they are heading.”

Eat, pray, love, plan

To visualize the concept, he develops a metaphor from the popular self-discovery memoir Eat, Pray, Love. The narrator of that book, Elizabeth Gilbert, talks about the future in terms of two horses—free will and fate—one of which you can control, and the other you can’t.

“Most organizations focus on the horse they can’t control,” he says. “Especially during moments of adversity, they get into negative thinking and focus on outside forces—Obama is changing health care regulation, China is dumping exports rather than focusing on what is within their power to change.”

By even making small experiments with new concepts and markets, managers focus on the horse under their control and increase the chances that the other horse will fall in line, or they’ll at least be able to better ride both horses into a new future in a more controlled way.

“It’s an easy thing to shift the blame onto someone else,” says Govindarajan. “But the more you can focus on planning for opportunity, the more you increase the possibility of creating a successful future for yourself.”

  • Book Excerpt

An MBA for Church Leaders

from: The Three-Box Solution: A Strategy for Leading Innovation
by Vijay Govindarajan

The mission of the Willow Creek Association was, said Mellado, “to help churches thrive. And the way we did that was by equipping church leaders  . . .  to be the catalytic mechanism to spur innovative thinking inside their churches.” The founding idea of the WCA was that as the leadership goes, so go the churches. It therefore sought to produce better, more creative church leadership.

The most difficult concept for a traditional church to grasp is the counterintuitive mission deeply embedded in Willow Creek’s model: that it is a church designed for the members it doesn’t yet have--the nonconsumers—rather than for the faithful who already have joined. Willow Creek’s focus on nonconsumers over consumers illustrates the difference between Box 3 and Box 1. Box 3 thinking materializes opportunities that exist but may not be visible.

While Box 1 thinking is comfortable and unthreatening, Box 3 thinking can seem contrarian. Indeed, when the Willow Creek case study was first discussed in class, one of Mellado’s fellow Harvard MBA students noted that the church’s program for reaching out to nonconsumers was like “taking business-class, frequent-flyer, million- mile-club kinds of people who fly all the time and pay full fare and asking them to sit in coach. And then taking first-time flyers—people who are afraid to fly—and putting them up in first class so they can have the absolute best first experience of flying in an airplane.”

But Mellado points out that the early Christian church grew from a handful of Christ’s disciples to three hundred million members as quickly as it did by serving the unchurched first and foremost. The church that Hybels originally envisioned was unique for its missionary spirit. The work of the WCA was to underscore that mission of service and outreach and to present the future-building Willow Creek model as logical and creative rather than jarring.

The other core aspect of Willow Creek’s success was that its founders built it around a strategy. “Strategy and church were two words that hardly ever mixed,” said Mellado. Some people, including business professors and students, tried to suggest that applying business disciplines to spiritual pursuits was inappropriate, that there was an important distinction to be made between selling Nike sneakers and selling religion. Religion was private and personal, and matters of faith were not subject to strategy.

Hybels disagreed. While the act of deciding whether to accept religion or convert from one faith to another might be deeply personal, the work of providing seekers with information and experience on which to base their decisions was surely amenable to strategy. Hybels said, “I happen to think that meeting the spiritual, physical, emotional, and cognitive needs of people through the church is a lot more important than selling shoes. But [I can’t] just divorce myself from my brain and let no strategy exist, waste resources, waste people’s time, and have no intentionality.”

Willow Creek was all about intentionality. While the church accorded great respect to a seeker’s private decision about taking or leaving the offer, in all other matters that might help shape the decision, strategy guided every aspect of creating the offer. Importantly, however, Willow Creek did not adulterate the substance of the Protestant belief system on which the church was founded. But because the WCA would attract pastors from many different Christian denominations, its curriculum was not mainly devoted to theology but rather to the church’s innovations in the areas of worship, outreach, and effective church management and stewardship.

I cannot emphasize enough how unusual an organization the Willow Creek Community Church was at the time of its founding. Certainly some of its uniqueness owes a debt to Hybels’s early business experience and training. But at the heart of Hybels’s vision was his insight as a teenager that there was a growing population of nonconsumers of religion and, worse, that many churches responded to their plight with surprising indifference. It was a problem that in 1975 had cried out to be solved. The WCA would take the solution to a new level.

The surprising power of the WCA idea—especially since Hybels initially conceived it as a way to free himself from a growing set of distractions—was that it had the potential to become a viral instrument. The WCA team would build a global network of pastors trained to be leaders and innovators. The network would then become a force multiplier for Willow Creek’s appeal to the unchurched, but with each pastor adding something new to the mix.

Reprinted by permission of Harvard Business Review Press. Excerpted from The Three-Box Solution: A Strategy for Leading Innovation. Copyright 2016 Vijay Govindarajan. All rights reserved.

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