A Three-Box Solution to Managing Innovation

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.”