Preparing for the Recovery

An interview with Vijay Govindarajan

June 22, 2009

An innovative idea is traditionally said to involve “thinking outside the box.” But not for Vijay Govindarajan, a professor of international business at the Tuck School of Business at Dartmouth College and an expert on innovation and strategy. That’s because one of Dr. Govindarajan’s favorite metaphors for strategy involves three boxes—and he encourages managers to think about what goes on inside all three of them.

In Dr. Govindarajan’s three-box framework, Box One involves managing the present—for example, improving the efficiency of today’s businesses. Box Two involves selectively forgetting the past. And Box Three? That’s about creating the future. Often, Dr. Govindarajan maintains, companies spend too much of their time managing Box One—the present—and think that’s strategy. Instead, he argues, companies need to spend more time and energy on thinking about Box Two and Box Three.

Dr. Govindarajan, currently professor-in-residence and chief innovation consultant at General Electric Co., recently spoke with MIT Sloan Management Review senior editor Martha E. Mangelsdorf for Business Insight. Here are excerpts:

Thinking About Innovation

BUSINESS INSIGHT: How should companies be thinking about innovation in the current economic environment?

DR. GOVINDARAJAN: In the current environment, the tendency for companies is to focus on efficiency and cost control—what I call “Box One” thinking, which is about managing the present. That’s inevitable because, for many companies, sales revenue has dropped by 50%, 60% or 70%. When your sales drop by 70% and you’ve got to maintain margins, you’ve got to cut costs.

However, as a response to the economic crisis, many companies focus almost exclusively on Box One. I think this is wrong. Box Two and Box Three are critical despite these tough times. You see, there are three things that stand out about recessions. One is: Expansion always follows recession—and the expansion lasts longer and is more robust than the recession. The second point is that a recession fundamentally changes the competitive landscape in most industries. There are new winners and new losers. That leads to the third point, which is: Focus on the future and play offense while also trying to control costs and play defense. The best time to prepare for expansion is during a recession, because during a recession, assets are cheaper and talent is cheaper and more available. So you cannot lose sight of what you have to do in the long term.

BUSINESS INSIGHT: But you also suggest that companies probably need to allocate their resources a bit differently during a downturn. Say a little bit about that.

DR. GOVINDARAJAN: I distinguish between two types of innovation: adjacency innovation, which is a little less risky because you are innovating in a business area adjacent to your existing core business, and breakout innovation, where you are going multiple steps outside of your core business. In a normal time, I would say spend about 50% of company resources on the core business and about 50% on adjacency and breakout innovation—perhaps 35% on adjacency innovation and maybe 15% on breakout innovation.

But during times like this, the percentages shift. I would shift to spending more like 70% on the core business and perhaps 25% on adjacency innovations—and maybe 5% on really breakout innovation. The investment in innovation in adjacency areas probably doesn’t change much, but you shrink some of the spending on real breakout innovation. The reason is: Breakout innovations are high-risk and high-payoff. And one thing you cannot afford during this economic crisis is to make a serious mistake.

In the Year 2025

BUSINESS INSIGHT: You say that companies often overfocus on Box One—managing the present. How can a company increase its focus on what you call Box Two and Box Three—selectively forgetting the past and creating the future?

DR. GOVINDARAJAN:  Box Two and Box Three are just as important as Box One. The challenge of Box Three—creating the future—is: How are you going to create your company’s future in 2025? And if you want to create your company’s future in 2025, selective forgetting—Box Two—is important, because not everything that you do today will be relevant in 2025.

BUSINESS INSIGHT: Can companies really plan today for the year 2025?

DR. GOVINDARAJAN: You cannot plan for the year 2025, but you can prepare for it. There’s a big difference in my mind between planning for the future and preparing for it. Preparing for the future simply involves asking what the broad trends are. If people in your organization can at least have a shared perspective on some of the big, nonlinear shifts that may happen, you can begin to think about actions that may be relevant if such shifts occur—if say, technology in your business changes in certain ways. You want to do your current plan in a way that prepares your organization for the future.

The future is full of surprises; you know that. What you want is to be able to prepare to respond and adapt and benefit from surprises. And that’s what happens when you explicitly think about 2025 in 2009.

3 Responses to “Preparing for the Recovery”

1. partha Says:
   July 3rd, 2009 at 12:32 am

   yes the problem becomes acuter when stagnacy call for the investemnt to be back from the thrid boxes as survival becomes more and more critical , the best possible way to keep the boat affloat. In any shallow water it happens the stwered of the boat just get scared whether the boat gets turtle.Where sailing forward becomes tougher , the scouting for new lands are far away.Even thinking something is not possible unless the water gets deeper and sailable.So most of the resource to be squarely divided between the existing business(keeping the boat affloat) and scouting for deeper water(the adjacency avenues to invest)surrounding the boat.Dreaming for newer island(break out innovation) should be shelved for some more time before the recession would dissolve away.

2. muni Says:
   July 13th, 2009 at 4:53 am

   Excellent knowledge sharing by VG, thanks to his visionary ideas on Strategy and Innovation, which are the pillars of 21st century organization.

   Especially, the organizations in service industry must focus on the adjacency innovation since this would help the firms to out perform their peers. E.g., Google’s revenue from adjacent innovation (like gmail, orkut) has significantly helped the firm to sustain its revenue and profit margins in these turbulent times.

3. handa Says:
   July 14th, 2009 at 7:09 am

   Leadership wisdom blends sailing through troubled waters with clear focus on future. In practice, while resources are scarcer and market conditions dim, dilution from core to new impacts not only liquidity but the existing employees. At one end recession eats into increments, while on the other newer ventures would demand investments. Paradox as above creates confusion among staff. With offers and opportunities rare and few in such times, employees continue to work but with lesser enthusiasm. Hence it is important that Box 1 and 3 are explained and discussed in depth with all layers. Business logic wrt 70:25:5 allocation as stated by Prof Govndrajan above must get supplemented by underlying ‘ I agree & that’s how bad times need to be beaten ‘ psyche of employees.

   Ajay Kumar Handa

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