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Transforming Your Organization with the Three-Box Approach
A conversation with Vijay Govindarajan and Brian Goldner
SPOTLIGHT ON BUSINESS MODEL INNOVATION HBR.ORG
ARTWORK Damián Ortega, Concrete Cube (black), 2003, cast concrete with black pigment
The CEO’s Role In Business Model Reinvention
108 Harvard Business Review January–February 2011
PHOTOGRAPHY: STEPHEN WHITE, COURTESY WHITE CUBE
A forward-looking CEO must do three things: Manage the present, selectively forget the past, and create the future. by Vijay Govindarajan and Chris Trimble
CONSIDER A FEW of the great innovation stories of the past decade: Google, Netflix, and Skype. Now ask yourself, why wasn’t Google created by Microsoft? Net ix by Blockbuster? Skype by AT&T? Why do established corporations struggle to nd the next big thing before new competitors do? The problem is pervasive; the examples are countless. The simple explanation is that many companies become too focused on executing today’s business model and forget that business models are perishable. Success today does not guarantee success tomorrow. To assess your company’s vulnerability, try this diagnostic: On separate index cards, write down all the important initiatives under way in your organization. Then create three boxes and label them “Box 1: Manage the Present,” “Box 2: Selectively Forget the Past,” and “Box 3: Create the Future.” Next, take a few minutes to imagine your industry in ve, 10, or even 20 years—as far out as you can reasonably foresee. Consider all the forces of change
your industry faces—technology, customer demographics, regulation, globalization, and so on. With those forces in mind, put your organization’s initiatives in the appropriate boxes: those intended to improve today’s business performance in box 1; those aimed at stopping something—underperforming products and services, obsolete policies and practices, outdated assumptions and mind-sets—in box 2; and those that prepare your organization for the long term in box 3. For companies to endure, they must get the forces of preservation (box 1), destruction (box 2), and creation (box 3) in the right balance. Striking that balance is the CEO’s most important task, but most companies overwhelmingly favor box 1. Forces of preservation reign supreme. Forces of destruction and creation are overshadowed, outmatched, and out of luck. To be sure, the work of preservation—the dayto-day execution of the existing business model—is
January–February 2011 Harvard Business Review 109
Vijay Govindarajan’s and Chris Trimble’s article, “The CEO’s Role in Business Model Reinvention,” appeared in our January-February 2011 issue. The article urged forward-looking CEOs to manage reinvention with a “three-box approach”: manage the present (box 1), selectively forget the past (box 2), and create the future (box 3). Leaders need to operate in all three boxes simultaneously. That’s easier said than done, for the CEO must not only balance resources across the three boxes but also know what to destroy and what to create. Brian Goldner, the CEO of Hasbro, Inc., was the chief architect of Hasbro’s turnaround strategy in 2000, which focused on leveraging the company’s core brands, reducing costs, and lessening its reliance on its licensed business. To do this, he relied and continues to rely on the three-box approach. In this edited conversation with HBR, Govindarajan and Goldner talk about how executives can implement the approach.
Vijay Govindarajan is the Earl C. Daum 1924 Professor of International Business and the founding director of the Center for Global Leadership at the Tuck School of Business at Dartmouth. He was General Electric’s first professor in residence and chief innovation consultant. Brian Goldner is the president and chief executive officer of Hasbro, Inc.
HBR: Vijay, you’ve been working with this approach for 30 years. Where did it come from? Govindarajan: In 1980, I was working with my rst consulting client, the CEO of a Fortune 100 company. I was an accountant by training, but CEOs aren’t interested in debits and credits; they’re interested in strategy. I needed to frame performance management in terms they cared about. At rst I created a framework with two boxes: one for today, where I could talk about performancemanagement systems for ongoing businesses, and one for innovation, where I could talk about investing for the future. Then I realized that moving into the future isn’t that simple. When you’re successful, you develop a dominant logic, a way of doing things. But if you try to see the future through that lens, you won’t see new business opportunities. To excel in innovation, you have to overcome your own dominant logic. Later I added what is now box 2.
1 Harvard Business Review Idea in Practice
ORG The Three-Box Approach at Hasbo Hasbro used one of its classic products to spread the message about the three-box approach. but it is also very practical. And we also realize that we need to think about the future. how do readers get started with this approach? Govindarajan: The starting point is to look at the projects you plan to implement in the next 12 months and sort them into the three boxes. and foibles to inform a future strategy. Manage the present Box Selectively forget the past Box Create the future Box Brian. In 2009. but many of them were lying fallow. It can be about relationships you have. So we looked for outside help. the company’s top eight brands represented 17% of total revenues. One notable example for us was our digital-gaming initiatives. Hasbro created a digitalgaming business that lost a lot of money. sometimes it’s about selectively So would you say box 2 is the most challenging? Goldner: In a company like Hasbro. We set about relaunching brands for the rst time in twentysomething years. We pursued the wrong platform at the wrong time to the wrong ends. Managing the present is where most of us spend our waking hours. and we quickly realized that we needed to make sure that the rest of the organization understood the strategy. It’s easy to see that we’re spending too much time in box 1. core business. VG’s three-box approach works at a very high strategic level.I. mistakes. that’s been around for a long time. we needed to remember what we had learned. How many of those projects are improving the performance of your . You need to remember that others went through those past experiences with you and may need to do their own forget- Background on Hasbro Hasbro is a multinational “branded play company” with more than 1. Rather than re-creating yet another business unit. which is box 3? And how many are geared at overcoming your dominant logic. Joe. why did you adapt the three-box approach at Hasbro? Goldner: Close to 10 years ago. The intense focus on brands has paid oﬀ. which is box 2? An example of a box 2 project would be plans to recruit people from the outside. and expanding globally. remembering—using misses. We had created our core strategy around the value of our brands. Brian. Although VG talks about selectively forgetting. Potato Head and Monopoly. Nerf. we were looking to reinvent the Hasbro Company. and Scrabble.500 brands including Transformers. It can be very personal. some success. We wanted to mentor that next generation to become better brand builders and sustainers. and through movies and electronic games. In 2000. We started to see Sometimes box 2 is about selectively remembering—using misses. creating immersive experiences for consumers online. which is what we wanted. In developing a new approach. and it’s where you need a sense of humor. and foibles to inform a future strategy. In the mid to late 1990s. Since 2000. we created an alliance with folks we could learn from. the top eight brands represented 50% of revenues. and we tend to make time for that. was that your experience? Goldner: We all get box 1 and box 3. in retail stores. Harvard Business Review Idea in Practice 2 Vijay. The company was started in 1923 as a remnant textile company and over many years moved into manufacturing toys and games such as Mr. the company’s earnings per share has grown 30% each year. mistakes. Then you need to think about the desired mix across the three boxes and begin working toward that.IDEA IN PRACTICE TRANSFORMING YOUR ORGANIZATION WITH THE THREE BOX APPROACH HBR. In 2000. It can be about ways that you’ve thought about the world. It can be about a prior business that was either successful or not successful. because outsiders tend to challenge the status quo. G. box 2 requires real introspection. which is box 1? How many are truly innovative and could fundamentally change your business. the company’s leaders set out to transform it from a toy and game maker to a branded play company. Box 2 is more subtle. This exercise will likely point out that you are overemphasizing box 1 projects and underinvesting in box 2 and box 3. This strategy focused on growing their own brands (rather than solely licensing others).
If you are going to put 20% of your resources into box 3. Then we narrow these ideas down to those that are most promising. and they don’t let short-term pressures tip the balance. Finally. you don’t have to gure it all out alone. how do you allocate your personal time using the three-box approach? Goldner: I quite literally review my calendar every week to see if I’m allocating enough attention to boxes 2 and 3. CEOs should set aside time in management meetings to not only do operational reviews but also discuss progress on box 3 projects. This also helps with resource allocation: The broader the top of the glass. what advice do you have for CEOs who want to adopt the three-box approach? Goldner: First. How have you seen executives meet this challenge? Govindarajan: It is easy to talk about but di cult to practice. Getting this kind of partnership to work smoothly is not always easy. As we move closer to the stem. you don’t need to fundamentally change your strategy. As Brian said. The team needs to be structured like a startup. Create a dedicated team to pursue box 3 ideas. which is all part of box 1. We had the idea to put our brands into movies 20 years ago. by de nition. reigniting.IDEA IN PRACTICE TRANSFORMING YOUR ORGANIZATION WITH THE THREE BOX APPROACH HBR. and its own culture. Then you need to amplify weak signals. For example. as far out as we can. People are likely to say. maybe you need to execute better on the strategy you’ve got. you have two options. and create the future sounds like a logistical challenge. immersive entertainment experiences were in our DNA. but we never created the relationships or the deals that enabled those movies to come to theaters. you need a dedicated team to pursue box 3 ideas. We have a tendency to favor today. Box 3 is full of unknowns because. Great leaders are disciplined about it. For us. The rst is to wait for the . and what you need and don’t need. the more we put into R&D. and reimagining our brands” but that wasn’t always the case. “I am already busy. We have a team called Future Now that works only on the future of our brands.” These meetings are named for the shape of the glass. you need to put a ring around that 20% and not touch it no matter what. sometimes I do lean more toward the present or the future. Brian. Of course how I spend my time is informed 3 Harvard Business Review Idea in Practice by what is going on in the company. As an executive. We also nd ways to comingle the boxes through “martini meetings. When we started doing that in 2000. Brian. The same goes for resource allocation. how do you sell a board of directors on a strategy that sort of smells like a strategy that may not have worked before? You need a dedicated team to pursue box 3 ideas. Why should I be helping someone from another part of the company?” So the CEO has to be careful when he or she is starting box 3 experiments and be on the lookout for con icts between box 3 and box 1 businesses. We just did a better job of executing. the three boxes are like a Russian nesting doll. We start at the rim. Real box 3 thinking. They are doppelg ngers that are in uenced by the shape and size of the others and can’t be dealt with separately. 11 years later. You’re conducting experiments to uncover future opportunities. Vijay. it is a lot clearer what you need to do in box 1. They don’t think about how to sell the brand this year or initiatives for next year. Second. Maybe PRIME YOUR ORGANIZATION TO BE SUCCESSFUL IN BOX . you need to realize that there are a number of avenues that will probably get you the desired result. The second principle is that although this team must be separate. Vijay. We get together for business reviews and nancial reviews. it took at least ve years before the organization understood and embraced the strategy. Lastly. so you tend to push them out. they delegate the re ghting and focus on the innovation project. some re ghting issues pop up. Every month they are careful to allocate enough time for today’s activities and tomorrow’s activities. it wasn’t really a new strategy. You have to link the dedicated team to your core business because there are certain assets and capabilities that you will want to leverage in your innovation e orts. are there organizational changes you recommend executives make to prime their organization to be successful in box 3? Govindarajan: First. Find a core group of people that you can trust to be honest about what you know and what you don’t know. Today. selectively forget the past. it is a bet about the future. you need to get your message out there early and often. If there is a review of a box 3 innovation project scheduled for a given day. most people in the company could tell you about “reinventing. It should have its performance-measurement system and product-development process. it cannot be isolated from the core. Box 2 and box 3 are more di cult to de ne.ORG ting or remembering. we see how those technologies can be applied to our current product lines. of course. asking executives to manage the present. Amplify weak signals by testing hypotheses about the future. and think about emerging technologies and new inventions. And I have to do the same for the company. and on that day. At Hasbro. For me. Link the dedicated team to your core business.
But we all need to be informed by box 2. We set an expectation that we’re going to think about lessons learned and use them to inform future strategies. whereas performance in box 3 is always in some distant future. What other threats or risks does the CEO need to be on the lookout for? Govindarajan: There are three important risks that the CEO needs to manage in box 3 experiments. We saw that we weren’t spending enough time talking Has there been resistance to the threebox approach at Hasbro? Goldner: De nitely not malicious resistance. and then when I’m 18. it’s more di cult. the CEO helps people see why they need to move north instead of south and how they cannot simply continue to do what they are doing today to get there. Brian. There was a toy category. by the time the signals are clear. Fortunately. The third thing was to change all of our processes so they didn’t just look at this year and next.IDEA IN PRACTICE TRANSFORMING YOUR ORGANIZATION WITH THE THREE BOX APPROACH HBR. The second thing we did was create regional centers of excellence for sales and marketing to change from a markets orientation to a consumer one. They got together and brainstormed ways that they could not only protect the present but also selectively forget the past. the game is over. As humans. so we added a third year to give us a stronger view into the future. When I turn 16 years old. The second risk is the pressure to improve short-term performance. The third risk is evaluating box 3 managers on nancial metrics. but. You can’t ask everybody to do all three-boxes. They came up with initiatives to potentially reinvent the church. At Hasbro. And the beauty of hypothesis is it can be wrong. The church was having some di culties. etc. I got a note from a pastor of a United Methodist church. They now have an approach to improve the nancial health and the mission of the church. then people start to enjoy it rather than resist it. This was a box 2 move—we had to forget how we operated in the past. By providing strategic direction. The original article is called the “CEO’s Role in Business Model Reinvention. Hasbro was very siloed. I wish we could do that but. Certain people really embrace this. Product development needs to be thinking further out. The second option is to amplify the signals by testing hypotheses and assumptions about the future. not the point of arrival. as long as we learned something from it. We also have an expectation that we’re going to spend time together as a team focused fully and fundamentally on the future. I graduate. Vijay. is it? Goldner: No. So he distributed the article to his management team. Accounts receivable is about box 1. we talk about setting new oors and not new ceilings. The rst is what we just talked about: the potential for con ict between box 3 and box 1. not at all. so that we don’t set limits but give ourselves places to launch from. And it’s OK. can you tell us what you’ve heard from readers since the article appeared? Govindarajan: One thing that strikes me is that people from all walks of life nd it useful.ORG signals to become crystal clear before you take any action. This means you need to evaluate these experiments not based on short-term results. learn things that they may not have worked so well in box 2. That gives the organization permission to develop ideas for growth. If you build that expectation. about box 3 if we only looked at two years.” but the three-box approach really isn’t just for CEOs. we’re focused on the arrival. and the pastor wasn’t quite sure how to move forward. Govindarajan: The CEO alone cannot do it. for others. After the article was published. But in business you need to be thinking about the point of departure. there is room in every organization for box 1 thinkers and box 3 thinkers. a group of volunteers. But we all need to be informed by box 2. it’s really about organizations. a game category. There is a tendency to pull resources away from box 3 projects and put them on box 1 because there is immediate grati cation when you focus on box 1. can you give readers an example of the structural changes you have made at Hasbro to support the threebox approach? Goldner: When we rst began this process. but we all struggle with change. but fundamentally deliver box 1. Harvard Business Review Idea in Practice 4 WHAT TO LOOK OUT FOR: The potential for conﬂict between box 3 and box 1 The pressure to improve short-term performance The tendency to evaluate box 3 managers on ﬁnancial metrics . I get a driver’s license. It’s OK to have taken a risk and failed. but on what you learn from them. So one of the rst things we did was move away from manufacturing categories toward a brand orientation with global brand leadership. The three-box approach adds an element of fearlessness. In fact. Salespeople need to glimpse moments of box 3. Fortunately there is room in every organization for box 1 thinkers and box 3 thinkers. CEOs have a hard time being patient with the box 3 experiment and demand data and results too soon. I don’t want them to think about box 3. You learn from the testing and then you scale up the box 3 experiment.
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