Vijay Govindarajan is a Coxe Distinguished Professor at Dartmouth College’s Tuck School of Business and a Marvin Bower Fellow at Harvard Business School. He has written several books and is a New York Times and Wall Street Journal bestselling author. He is best known for Reverse Innovation: Create Far From Home, Win Everywhere, which he co-authored with fellow Tuck School of Business professor, Chris Trimble. The book talks about the closing innovation gap between developed and developing nations. Govindarajan’s latest book, The Three-Box Solution: A Strategy For Leading Innovation, revolves around the need to consistently chase innovation. He talks to Fortune India about each of the three boxes and why innovation is necessary. Edited excerpts:
From Reverse Innovation to The Three-Box Solution, how has the nature and scope of global corporations changed?
Historically, companies innovated in a developed country like the U.S. and sold those products in a poor country like India. That is why most multinationals are headquartered in developed countries. Reverse innovation is about doing the opposite. It is about innovating in a poor country and selling in a rich country. As reverse innovation gathers steam over the next decade, more global corporations are likely to be headquartered in emerging economies.
The first box is about managing the core business at the peak of profitability. Tata Steel is having issues with its assets in Britain. Is this a result of not following this box?
There is overcapacity in the steel industry, and the challenges that integrated steel companies have to face to reduce capacity are more difficult compared to mini mills. It also becomes problematic if the factories are located in countries with high labour costs. Tata Steel’s woes in Britain might be because of a combination of all these factors.
In the three-box solution, which is the most critical? Is it Box 2—abandoning practices that inhibit innovation?
Yes, because forgetting is the most difficult thing to do for organisations. Managers who exploit current businesses develop mindsets based on what they have experienced in the past. Such mindsets become further embedded in systems, structures, processes, and cultures that are self-perpetuating. Organisations that cannot erase memory do not notice that many entrenched mindsets have lost relevance in the present circumstances that require exploring for new businesses. Therefore, before you can create, you must forget. I have found that unlearning, although indispensable, is difficult.
Box 2 is about selectively forgetting the past. This often comes down to making key distinctions between values that are timeless (enduring in the long run) and those that are timely (perishable with time). A leader needs to understand that an organisation’s roots have timeless values that need to be preserved. However, every organisation also accumulates “chains” that consist of ideas and activities that have lost their usefulness. If you do not break these chains, they will hold you back from getting to the future. So, do not forget everything. Just forget the chains, and preserve the roots.
Could you give us examples [one Indian and one foreign] of companies that have followed and prospered using the three-box solution?
Mahindra & Mahindra is an Indian company that is a three-box balance exemplar. It has pivoted in three major ways: moved into the automotive sector with the Scorpio; has become a global company; and has built a strong presence in the defence sector.
In the U.S., Hasbro [a toy and games manufacturer] has practised the three-box solution well. It has transformed from an American company to a global one, from a product company to a brand, and from an analog company to a digital company.
Despite the buzz around startups in India, 2016 could be a tough year for many large, relatively new companies, especially those in the e-commerce and tech sectors. What are the lessons these companies have failed to learn?
It takes time for a startup to show results. For instance, it took 20 years for Keurig (a U.S.-based manufacturer of beverage brewing systems) to become a success. Also, many startups do fail. For every Facebook, there are hundreds of startups in the social networking space that have failed. Startups operate in an embryonic space with a lot of unknowns. We need an entire ecosystem for startups to succeed—universities doing basic research, a vibrant venture capital community, risk-taking entrepreneurs, and so on. We need to give India more time to work through these difficult issues.
E-commerce represents a huge growth play for startups in India for three reasons. One, high mobile phone penetration; two, a young population that likes to shop using mobile technology; and three, higher disposable income. Because of these reasons, there will be many companies like China’s Alibaba coming out of India in the next decade.
What with events like Occupy Wall Street and the leak of the Panama Papers, are global corporations under more threat than ever before?
Today the world is facing major issues, and only companies with massive resources and global scale can solve them. Big corporations have such resources and capabilities. General Electric [GE], for instance, is ideally suited to address problems of health care, transportation, and energy that the world needs. Its push into the Internet of Things will make a difference in a positive way.
There seems to be widespread resentment against capitalism in many parts of the Western world. How can businesses counter this?
There is strong criticism against the Milton Friedman form of capitalism—the business of business is business. This view, which espouses shareholder value maximisation as the sole objective, has come under attack. India has an opportunity to handle capitalism in a new way—have zero conflict between doing good and making money. Narayana Health, a multi-speciality hospital chain in an example. It provides open heart surgery to the masses in India for $3,000 (Rs 2 lakh), whereas in the U.S. it would cost $150,000 (Rs 1 crore). Yet, Narayana Health is profitable, and its founder, Devi Shetty, owns 60% of the hospital, which has a market capitalisation of a $1 billion. Yes, he is a capitalist, but not the Friedman kind, rather a compassionate capitalist. He has a social heart and a business mind. We need more such entrepreneurs and corporations.
Do you think the three-box solution could apply to the functioning of a government as well?
Absolutely. Prime Minister Narendra Modi should lay out his initiatives for India in each of the three boxes. For a country as well, the future is now.