The Three Box Solution

Box one is competition for the present, that's all about efficiency. Box two, box three is competition for the future, that's all about innovation. Since both are important, strategy is really about, how do you create your future while managing the present?

Rachel Salaman: Yes, which is probably something that a lot of leaders struggle with. So how and why is it helpful to think in terms of these three boxes when planning for innovation?

Vijay Govindarajan: I think the logic is very simple, and that logic goes something like this: future is now. Future is not about what you have to do in the future. Therefore, if a company wants to become a leader in the year 2025, it's not about what you have to do in the year 2025. It is about what you have to do now, across the three boxes. Because future comes in daily doses. Future doesn't arrive all at once. Therefore every company must focus on today and tomorrow every day. That's the idea behind the Three Box Solution.

Rachel Salaman: So it's just a different way for some people to look at innovation. Why did you see a need for this book?

Vijay Govindarajan: I think what I have found working with organizations is they over-focus on box one and then they think they're doing strategy. While box one is terribly important, strategy has to include box two and box three. As I mentioned before, box one is competition for the present - that's all about efficiency. Box two, box three is competition for the future - that's all about breakthrough innovation - and I find far too many companies focus exclusively on efficiency.

While efficiency is important, if you want to become a leader in the future, you have to excel in efficiency as well as breakthrough innovation. Yet companies ignore breakthrough innovation. That is why I wrote this book.

Rachel Salaman: And who do you expect will get the most out of the book?

Vijay Govindarajan: Every manager in every company should read the book. In fact, the Three Box Solution obviously applies at the CEO level, but it also applies at a functional department level. A human resource department needs to have projects in box one, projects in box two, and projects in box three.

But it also applies to individuals. You can use the Three Box Solution to drive personal strategy because, even as an individual, you must focus on all the three boxes every day because, even for individuals, future is now. Future is not about what you have to do in the future.

Rachel Salaman: In the book you make a distinction between linear and nonlinear innovation. What is that distinction and is one more desirable than the other?

Vijay Govindarajan: Linear innovation is box one. There you are innovating around your current business model. That's all efficiency. Nonlinear innovation is box three. That's breakthrough innovation. Therefore, if an organization has to become a leader in the year 2025, you have to really excel in linear innovation plus you have to excel in nonlinear innovation.

Therefore, both are important and, as an organization leader, you have to decide how much of the portfolio should be in linear innovation and how much of the portfolio should be in nonlinear innovation. And what I found working with companies is they exclusively focus on linear innovation. That is the problem.

Rachel Salaman: If people are struggling a little bit with these categories, can you give us an example of how a company might go about linear innovation versus nonlinear innovation, perhaps using a common example?

Vijay Govindarajan: Take, for instance, the automobile industry. Ford invented and innovated the mass market for automobiles with the Model T at the turn of the 20th century. For the last 100 years, essentially the automobile industry was excelling using mechanical engineering, designing engines and shafts and pistons, and so on and so forth. So, in the year 2016, if you are the Ford Motor Company, you have a box one job. You have a competition for the present. You have linear innovation, which is to continually improve gasoline powered automobiles.

However, if Ford has to become a leader in the year 2025 in the automotive industry, it has to excel also in nonlinear innovation. Whatever nonlinear innovation it should focus on - think about driverless cars, think about electric cars, think about sharing economy like Uber - that requires Ford to build completely new core competencies in computer science, artificial intelligence, robotics.

Therefore, if you're the Ford Motor Company, you have two jobs to do today. One job is to improve the efficiency of your box one businesses, which is gasoline powered automobiles. The other job is to invent your future with driverless cars and electric cars and sharing economy etc.

That is the central challenge for every organization.

Rachel Salaman: Let's talk a bit more about the boxes in turn now. Starting with box two - the past - can you tell us about distinguishing between roots and chains, which is a distinction you make in the book?

Vijay Govindarajan: Every organization has roots, every organization has chains. If you cut the roots, the tree dies. Therefore you had better understand what your roots are, preserve it, nurture it, fertilize it, strengthen it, keep it forever.

Every organization is also held to the past with chains. That's what you should break loose from. If you go back to the Ford Motor example, one of the chains they must break loose from is exclusive focus on mechanical engineering. Unless they forget that logic, they will never get to the future.

Rachel Salaman: You talk about forgetting and you mentioned selectively forgetting a little earlier. How difficult do leaders find that to do?

Vijay Govindarajan: Probably the most difficult of all the three boxes. Box two is the most difficult. Again, if you go back to the Ford Motor Company, it will be very, very difficult for them to forget that mechanical engineering is not the core competency of the future, because for 100 years they have succeeded with this core competence. They have succeeded with that way of doing business.

Forgetting is a problem because what you need to forget is a future weakness. But it is embedded in your current strength. That's why forgetting is difficult. What you need to forget is a future weakness, but it is your current strength.

Rachel Salaman: Do you have any tips for leaders about how they can get that right?

Vijay Govindarajan: I think the best way to do it is to create a dedicated team for box three. So, if you're the Ford Motor Company, you have to create a dedicated team for electric cars, you have to create a dedicated team for driverless cars. And the dedicated team should have some separation from the box one performance engine, so that you can forget the rules of the game of box one.

Rachel Salaman: In the book you say that innovators should fill box two - the past - before filling box three - the future. Can you talk us through that?

Vijay Govindarajan: That is exactly what I mentioned by dedicated team. When you create a dedicated team, it simultaneously achieves box two - forgetting. But also, if the team is put together correctly with computer scientists and artificial intelligence and robotics people, going back to the Ford Motor example, then they will be able to create an electric car so you build the right capability.

So simultaneously box two and box three are two sides of the same coin.

Rachel Salaman: Now, going back to the idea of roots and chains, how can that dedicated team make sure they're not mistaking roots for chains and vice versa?

Vijay Govindarajan: I think constructing the dedicated team is very important. You have to ask yourself the question, again going back to the Ford example, if you want to create an electric car, what are the right capabilities you need in the team? What are the right processes, right metrics? And if you ask those questions, you will only forget what needs to be forgotten, but preserve what needs to be preserved.

Rachel Salaman: So looking now at box three - the future - you advise in your book that leaders should place the smaller bets first. What do you mean by that?

Vijay Govindarajan: Box three is a bet on the future. Because it is a bet on the future, it is full of assumptions, it is full of unknowns. So the question is how do you move in a future with so much unknowns? The best way to do it is to test assumptions and, when you're testing assumptions, what you are doing is converting assumptions into knowledge. And when you're doing that, the golden rule is spend a little, learn a lot because there are a lot of assumptions to test.

Keep the cost of experiment low. If the cost of experiment is low, the cost of learning is low, the cost of failure is low. Therefore spend smaller amounts first, and understand a little bit more about the future before you spend bigger amounts. This is almost like running a marathon race - you don't run a marathon race in a single breath, you have to break it into digestible parts. That's what I mean by spend low amounts first before you spend larger amounts.

As an example, in the mid-seventies, IBM wanted to do a box three experiment. IBM at that time was primarily a hardware company. They were making mainframes and selling it to corporations, and the particular box three they wanted to do was a nonlinear innovation and become a software company in addition to a hardware company. That is a big nonlinear move. And the specific box three project they wanted to pursue in the software arena was speech-to-text. If you talk in front of the computer, it will produce the text. This is something like Sirie now. If IBM wanted to develop the software in the mid-seventies, it would have cost IBM millions and millions of dollars to develop the software. But IBM didn't know whether the customer was ready for a product like this, whether the market would like it, how much would the customer be willing to pay for it. They didn't have any clue about those questions.

Now, how do you understand those questions without spending millions of dollars developing the speech-to-text product? This is the low-cost experiment that IBM did, to understand whether this product has value. So they brought all their customers into a room, many of their customers who were senior executives, and in that room there was a mainframe computer and in front of the computer there was a microphone. And they told the executives to talk for an hour in front of the microphone, and told them they have an exciting breakthrough new product called speech-to-text, which can convert their speech into text. They already have that product. They've spent millions of dollars developing the product and they want to know how the customer will like it, and how much will the customer be willing to pay for it. The only thing is, IBM didn't have the software, so they had 100 typists in the next room and, as the executives are talking in the microphone, the typists are busily typing away.

And, after an hour, what they found was that the executives were not enthusiastic about this product. Not because the text was incorrect - the text was 100 percent correct - that was not the problem. There was a whole slew of issues that they did not even anticipate. All the very simple things from it hurts someone's throat to talk in front of a computer for an hour to executives didn't feel comfortable talking confidential things so loudly in front of a computer.

My point is, in box three, you don't want to build the product and then test whether it is viable. You want to test its viability first by using low-cost experiments and then build the right product.

Rachel Salaman: You talked about the relationship between box two and box three - the past and the future - and that they were two sides of the same box, if you like. What about box one - the present? What's the relationship between box one and box three - the future - in practical terms?

Vijay Govindarajan: I think box one is the foundation. Box one is the performance engine. Box one is the one which is creating current profits, generating current cash flow, which is what you use to invest in box three. And box three is about future profits. But once box three becomes successful, it will become box one eventually, and then you create the next box three.

And so it's not a project - the Three Box Solution is a continuous cycle.

Rachel Salaman: The idea of planned opportunism comes up a lot in the book. What do you mean by that?

Vijay Govindarajan: Planned opportunism is a notion which says future cannot be predicted. If future is not predictable, how do you prepare for a future you cannot predict? One way you can do it is to wait for the year 2025 to arrive before you start doing anything. That's pretty myopic because, by the time the year 2025 arrives, you wouldn't be able to start that day and catch up with the future. You have to start catching up with the future in 2016.

Now, how do you catch up with the year 2025 in the year 2016 when you don't know what's going to happen in the next 10 years? And that is the notion of planned opportunism. While the future cannot be predicted, you can prepare for the future and preparing for the future is the planned part. What do we mean by prepare for the future? You can develop this discipline for low-cost experiment - that's the way to prepare for the future. You can build new core competencies now. Not the competencies you need for your box one business but the competencies you need for the future. So if you are the Ford Motor Company, you should start hiring computer scientists, you should start hiring artificial intelligence experts, even before you build that box three business.

And that's what I mean by planned opportunism.

Rachel Salaman: What are some ways for leaders and their teams to determine which areas to plan in, given that, as you say, you just don't know what's coming?

Vijay Govindarajan: I think that is where this notion of weak signals comes. There are lots and lots of weak signals today. The definition of weak signals is it could either be noise or real signals, and that is why they are called weak signals.

In box one, you respond to clear signals. In box three, you are responding based on weak signals, and there are lots of weak signals today that using which you can develop a point of view about the year 2025. Using the weak signals, you can think about which customer really is slow in 2025, what are the sort of technologies will you face in 2025. Based on the weak signals is what you build new competencies.

Rachel Salaman: How do you detect those weak signals? In what ways can you sense them?

Vijay Govindarajan: The best way to detect weak signals is to engage the mavericks in your organization. Mavericks have two qualities: one is they are crazy thinkers and second, they are organizational nightmares. They can't get along with anybody and those people exist and sometimes we shut them down. But, instead, we should pay attention to them because they observe the weak signals. And then, as leaders, you need to have a conversation around what are the implications of that in terms of competencies that we need to build.

Rachel Salaman: So let's talk about some ways for leaders to apply this three box strategy. For example, if a company is large enough, should different teams think of themselves as working in different boxes explicitly? You've already talked about forming a box three team. What about existing teams in the company? Should they reframe what they do?

Vijay Govindarajan: Certainly, if you want to want to succeed in box three, you must create a dedicated team and that dedicated team should have some separation from the box one performance engine. The way companies can benefit from the Three Box Solution, I will give three prescriptions. One, they must ask their businesses to submit strategies and projects in box one separately from projects in box three. Two, you allocate resources separately for box one and box three. Three, you put together a dedicated team for box three and evaluate that dedicated team based on accountability for learning, whereas box one you evaluate them on short-term financial resource.

If you do these three things, you can practice the Three Box Solution.

Rachel Salaman: Throughout the book you stress the importance of balancing the three boxes and you say that the key to this is to recognize the linkage among them, which you've talked about a little bit already. How does the balancing process work in practice?

Vijay Govindarajan: I think the important thing in balancing is you need to understand the rate of change in your industry. So it's not one third, one third, one third for every company. It depends on the dynamism in your industry. If it is a very fast changing industry, you probably need to spend more time in box two and box three. If it is a slow-moving industry, probably you need to spend more time in box one. And therefore, depending upon the type of industry, you strike the right balance.

Rachel Salaman: Do you have any tips for leaders to find that right balance? What kind of things should they be assessing?

Vijay Govindarajan: I think this is going back to my earlier point with weak signals. Based on the weak signals, you think about how fast your industry is likely to change and then you assess the portfolio of the projects you have in box one, box two and box three.

The Three Box Solution is a very simple idea. But it is simple to say but not simple to do, because you have two jobs to do today. When you say future is now, now you have two jobs. One job is to improve the efficiency in your box one businesses, which is a known system. Another job is to create a future leadership in the year 2025, and that's an unknown journey. But today you have to do both, yet there are inherent conflicts, inherent paradoxes, inherent tensions between the two. That is why the Three Box Solution is easy to say, but not easy to do.

Rachel Salaman: We've covered a lot of ground in this discussion about the Three Box Solution. What are the key takeaways for leaders who want to drive more innovation in their organizations?

Vijay Govindarajan: I think [there are] three key takeaways. One, innovation is very important. Particularly, innovation is even more important today than 50 years ago because the rate of change is only accelerating. So that's point number one. Point number two is innovation is hard, innovation is not easy, because you are dealing with the future and the future is inherently unpredictable. Three, there are disciplines, tools and methodologies you can use to master the innovation. That is what is described in the Three Box Solution.

So my three key points that I want to leave with the audience is that innovation is important, innovation is hard, innovation can be done.

Rachel Salaman: Vijay Govindarajan, thanks very much for joining us today.

Vijay Govindarajan: Thank you so much.

Rachel Salaman: The name of VG's book again is, "The Three Box Solution: A Strategy for Leading Innovation," and you can hear him talk more about the practical side of innovation in a different podcast on the Mind Tools site. In that one, he focuses on one of his other books called, "The Other Side of Innovation: Solving the Execution Challenge."

I'll be back in a few weeks with another Expert Interview, until then goodbye.