One of my favorite strategic innovation thinkers is Professor Vijay Govindarajan, from Dartmouth’s Tuck School. He proposes an interesting idea that helps bring the idea of innovation squarely into the space of strategic planning.
One of the hardest things for executives to balance is the dichotomy between short and long-term thinking. We all WANT to be strategic, don’t we? We all WANT our organizations to be capable of break-through innovation, don’t we? But we must also meet the financial metrics for this quarter or month. Both are important. If we are too far forward-thinking and fall out of covenant with our lenders, this can be a serious problem. But living our entire lives dealing with quarterly financial goals and tactical matters leads to eventual problems also. So we need to strike a reasonable balance between the short and long-term view. My personal sense is that for most of us, our bias is too far in favor of the short-term – since these problems are likely to be more immediate.
This tension between short and long-term is perhaps the biggest impediment to strategy execution I can think of. We have no problem thinking “big” thoughts when we engage in strategic planning. But when the plan is created, it is hard to pull ourselves away from the pressures of meeting daily performance goals.
Senior Leader Mindset
Senior leaders need to fight this tendency, and it helps if they develop a mindset that accepts that:
- The world is rapidly changing. Technology, demographics, social attitudes, economic trends and so forth are in a continual state of flux.
- To think you can simply keep reengineering your business around what you do today is a dangerous mistake that can lead to disaster. Every business needs the ability to leap to the next wave at the right time.
When we think about some of the greatest innovation stories of the recent past, Dell Computer, Amazon.com, Netflix, Zappos, etc. we marvel at how these people managed to imagine game-changing ways of creating new business value. What interests me is the question “why did it take outsiders to develop these innovations? Why didn’t IBM come up with Dell? Why didn’t Sears or K-Mart develop Amazon? Why didn’t Blockbuster create Netflix? It is interesting that we are willing to face bankruptcy, or exit a business rather than develop new business models that are different from our primary way of operating.
Govindarajan invites us to consider that our strategic planning process should explicitly include planning around three very different sets of initiatives. He calls his concept the Three Box System.
Here is the exercise he suggests you try when you sit down with your team to consider the next round of strategic planning. Make a list on post-it notes of all of the major initiatives your organization is pursuing and committing major resources of money and people. On each post-it, also write down the approximate level of resource allocation each initiative carries. Now on a board, draw three large boxes, and place each post-it into the proper one.
The boxes should be labeled thusly:
1) Managing the Present – driving improvement in your current operations – lowering cost, increasing quality, improving service, etc.
2) Selectively Pruning Away the Past – making room for the future. This is about strategically identifying things you should be planning to “kill” – like underperforming businesses, products, or segments that are consuming resources without producing desired returns. Strategically, means we are looking at the changing environment and recognizing when the key trends are not aligning in a positive way.
3) Creating the Future – investing in new markets, products, services, or businesses that are taking advantage of the key trend drivers in your world. Again, this is a strategic action considering the key industry drivers and a deeper understanding of unmet consumer needs.
After you have completed the exercise, the hard part is to have a discussion about whether your resource allocation is reasonable. My strong sense is that most of us have far too much in the first box and almost nothing in the second.
I asked earlier why Blockbuster or perhaps Barnes and Noble did not invent Amazon or Netflix. My belief is that most of us cannot imagine creating something that would cannibalize an existing piece of business. This may be because of ego (not wanting to admit we are not succeeding), fear of incurring losses in a current business segment before the new one finally takes off, or possibly because we didn’t want to face the step of laying off employees. Whatever the reason, the resulting outcome is to allow our under-performing units to die a slow and painful death – consuming even more resources on the way down. In the end we still kill them, but we could have done so much earlier and redeployed valuable resources in more productive ways.
Deciding on the right resource allocation for your business is cannot be scientifically determined. In general the faster and more dynamic the change environment is in your industry, the more initiatives you want in box number 3.
In my company, Robotron Corporation, box 3 was a big arena. One of our strategic metrics was the amount of sales we had from products or services that didn’t exist three years earlier. We tried to be at 20% or higher. To achieve this, we spent over 7% of our sales revenue on new product development. If anything, we may have been too biased in this area – sometimes finding ourselves on what I call “the bleeding edge of technology”. (Robotron’s story is profiled in the book The Next Level, Essential Strategies for Achieving Breakthrough Growth, by Jim Wood.)
The main point here is that you should be thinking about making moves in all three boxes. Strategy requires that we be deliberate in the choices we make about what products or services we will offer, to whom we will offer them, and how we will strive to achieve a sustainable competitive advantage. As executives this means we have to bet our precious and limited chips carefully on the initiatives that can yield the greatest benefit.
Watch this 7 minute video featuring Vijay discussing the need to create new executive mindsets.
Transforming your Organization with the Three Box Approach, by Vijay Govindarajan and Brian Goldner
The CEO’s Role in Business Model Reinvention, by Vijay Govindarajan and Chris Trimble