A ‘Three-box Solution’ for Leading Innovation
In a new book, The
Three-Box Solution: A Strategy for Leading Innovation, Vijay Govindarajan,
bestselling author and professor at Dartmouth’s Tuck School of Business, offers
a roadmap for leaders who want to make their organizations more innovative.
Govindarajan broke down the three boxes on the Knowledge@Wharton show on
Wharton Business Radio on SiriusXM channel 111. (Listen to the podcast at the
top of this page.)
An edited transcript of the conversation
follows.
Knowledge@Wharton: The
Three-Box Solution was inspired by your native India, correct?
Vijay Govindarajan: That’s
right. In Hindu spirituality, we recognize three gods. Lord Vishnu, the God of
Preservation, is box one: manage [the present]. Lord Shiva, the God of
Destruction, is box two: destroy the past. And then there is Lord Brahma, the
God of Creation; that is box three: create the future. Therefore, the three-box
solution is really tied to Hindu Scriptures….
The basic idea here is the future is now. The future is not what
you have to do in the future. That means, if you are a corporation and you want
to be a leader in the year 2020, the job does not start in the year 2020. The
job starts [today]. The future is now. Your future is now. Corporations need to
take actions in three boxes.
Box one is manage the present. That means you’ve got to improve
the efficiency of your current businesses, the way they are constructed today.
Box two is about … the past. You have to abandon some of the mindsets and
practices from the past. Box three is about creating the future….
Knowledge@Wharton: I
was very interested in the second box: escape the traps of the past. Do you
mean having an eye for future problems and cutting them out before they become
a problem?
Govindarajan: That
is absolutely right. Box two is the biggest problem. In having worked with
companies, what I have found is box two is where they struggle. Box two is
about forgetting; box three is about creating. Box three is about learning; box
two is about unlearning. If you cannot forget, you cannot learn, yet
organizations find it extraordinarily difficult to forget. Think about how many
books we have written on learning organizations.
We haven’t written a single book on forgetting organizations. If
you can’t forget, you can’t learn. The reason why forgetting is a problem is it
is in the mindsets, and that mindset is formed on your success in box one….
Knowledge@Wharton: Is
that why we see so many companies looking to pare down their operations or sell
off pieces of their operations?
Govindarajan: In
fact, selling off businesses is one way you can do box two. For instance,
General Electric [sold] their finance business. Or Procter & Gamble [sold]
many, many of their businesses in the beauty and personal care segment. That’s
one way you can do box two. That doesn’t mean these are bad businesses, but
they don’t fit with your future. It may fit with someone else’s future.
The other way you can do box two is change people’s mindset….
Box one success creates mindsets and principles, some of which you have to
selectively forget, but that’s where the biggest challenge is. Erasing
organizational memory is the toughest challenge.
Knowledge@Wharton: You
alluded to the fact that it is hard for a lot of companies to look to the
future when the level of success they are having in the present is so good.
You’re so worried about keeping that level of success going that you don’t
think about the next five to 10 years, right?
Govindarajan: That
is absolutely right because it looks like the year 2020 is too abstract…. But
the fact is the future is now. Because if you only focus on today every day …
one day you are going to wake up and the year 2020 will be today.
That’s a lousy way to run a country, that’s a lousy way to run a
company, a lousy way to run one’s personal life. Yet it is difficult because of
your box one success. That is why I say when you’re successful in box one, you
can actually afford to conduct some experiments to test the future….
Knowledge@Wharton: You
mention General Electric in terms of what they have done and the paring off of
GE Finance, but just in looking at that company as a whole, what is it that
they have done outside of the move with GE Finance, what is it that they have
done that has them looking so far in the future right now?
Govindarajan: GE
is a great example of three-box solution. Because GE has a 136-year history,
that means they have done three-box solution as a continuous rhythmic activity.
Otherwise, they are not going to survive for 136 years…. But
Jeffrey Immelt, if you just take a look at his tenure, he essentially pared
back in box two. He has done many things in terms of diversifying businesses,
starting all the way from insurance, NBC Universal, more recently, finance
businesses. In box three, he has invested aggressively in emerging markets.
Emerging markets have phenomenally grown under his watch, and he has created
many affordable products in healthcare and the energy sector there. More
recently, the Internet of Things is a great example of really re-imagining
General Electric because GE, as you know, is very much a hardware company. They
make medical imaging equipment, like X-ray machines and CAT-scanners. In
energy, they make large gasoline turbines. In aircraft, they make aircraft
engines. These are all hardware products, where they are fantastic.
What Jeffrey Immelt wanted to do was create a software
powerhouse. Because they are so successful in box one, what he did was he
created a dedicated team in Silicon Valley and recruited about 1,000-plus
software engineers who have created this Internet of Things. That dedicated
team, therefore, has some separation from the box-one performance engine.
That’s why it can forget. Forgetting is a challenge for box one. But creating a
dedicated team is a way you let them invent their own rules, without getting
bogged down by the rules in box one. However, the dedicated team is connected
to the mothership — it’s my point.
Because GE can invent an Internet of Things, because they have
software that is benefitting from the hardware. The aircraft engines generate
so much data that the Internet of Things can leverage. Similarly, gasoline
turbine engines or the X-ray machines and CAT-scanners. That is why a pure
Silicon Valley startup cannot beat GE. I am a big fan of big companies.
Too many people have criticized big companies. I say we need to
defend big companies, companies like Vanguard have reinvented itself with
web-based advisors…. The New York Times has reinvented itself with New York
Times Digital. Google has reinvented itself many times. Big companies are a
force for the good.
Knowledge@Wharton: You
mention the publishing industry has failed in trying to play out the three-box
solution, for the most part. Where does the majority of the publishing differ
from what The New York Times has been able to do?
Govindarajan: The
publishing industry’s struggle is a classic example of why the three-box
solution is so hard. The publishing industry had an analog model. In the analog
model, which is the printed medium, the margins are very high and the model is
[subscription or advertising]. When it moves to digital, suddenly from analog
dollars you are making digital pennies, and you don’t even know how to monetize
it, and digital has the potential to cannibalize the analog model. That is why
it is very important to create a dedicated team in the analog business.
Otherwise, it would crush the digital business. The New York Times did a great
job.
They created a dedicated team for New York Times Digital, but
the dedicated team was connected to the mothership because it borrowed The New
York Times brand name, obviously, of the content, et cetera. If you have this
hybrid organizational model where you create a dedicated team and the dedicated
team is separate from the box-one performance engine, even in the publishing
industry you can survive.
Knowledge@Wharton: Outside
of the publishing industry, are there other examples of corporations that just
haven’t been able to figure it out to this point?
Govindarajan: In
fact, I would say most companies cannot figure it out. The reason they find it
hard to figure it out is the more successful you are in box one, you can go
into a preservation mode. It is just natural. The other reason is if you don’t
invest in box three today, it does not hurt you today. It hurts you in the year
2020. Therefore, you kind of slip.
I’ll give you a quick example. Take a box-three activity for an
individual, which is doing exercise every day. If you do exercise every day,
your health is assured in the year 2020. People don’t practice exercise every
day because you give all kinds of excuses today. You may say, “[Today is] my
book launch. I am too busy today; therefore, I am not going to do exercise
today.” If you don’t do exercise today, it does not hurt your health today. It
hurts it in the future. So it is easy to slip. By the way, if you don’t do
exercise today, your health does decay today. But the decay is so small, so
invisible to ignore. This is the reason why companies struggle in three-box
solution.
Knowledge@Wharton: We’re
talking about some bigger-name companies here, but is it something that fits
also with medium- and small-sized companies, as well?
Govindarajan: Absolutely.
Even a Silicon Valley startup has to practice three-box solution. This is the
interesting thing. I have given this presentation in Silicon Valley. People
assume it doesn’t apply to startups. Of course, when you are just a pure
startup, there is no box one, there is no box two; you only have box three. But
what happens in Silicon Valley is very quickly, your box three becomes box one.
Therefore, you get into the three-box solution problem. By the way, that is the
reason why many of the unicorn valuations are declining in the last 12 months.
Take, for instance, Dropbox. Dropbox came up with a brilliant box-three move,
which is, on your desktop, you have a magic folder in which you can store data.
They were first unicorns. What happens is Apple comes with
iCloud, Amazon comes up with Cloud-based storage; the empire does strike back.
When an empire strikes back, the box three of Dropbox became box one. They
didn’t come up with the next box three. That is why their valuations are
declining.
Knowledge@Wharton: Is
it even a little bit easier now for companies to find these new ways to
innovate because of the digital nature of our lifestyles, in general?
Govindarajan: You
are absolutely right in this sense. If a company does something smart, because
of digital technologies, it will become transparent to the rest of the world.
Therefore, it is very easy for someone else to imitate what you do. That is why
you have to do the next box three. Otherwise, somebody else will copy what you
are doing. In fact, the three-box solution has become even more important
because the rate of change and the rate of imitation are very high these days.
http://knowledge.wharton.upenn.edu/article/govindarajan-book-the-three-box-solution/?utm_source=kw_newsletter&utm_medium=email&utm_campaign=2016-05-05
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