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#003 Feb 4, 2026

The Three Boxes Framework

Notes from Prof. Govinda Rajan's lecture on strategic innovation

The Three Boxes

Every project falls into one of these:

1
Manage the Present
Improve today's business
2
Selectively Forget the Past
Abandon what no longer works
3
Create the Future
Build breakthrough innovations
Big insight: Most companies over-focus on Box 1 and think that IS strategy. But Box 1 is NOT strategy—it's operational excellence. Real strategy = Box 2 + Box 3!

Linear vs Non-Linear Change

Linear → Box 1 "Competition for the Present"
Incremental improvements
Six Sigma, optimization
Closing the performance gap
Non-Linear → Box 2+3 "Competition for the Future"
Business model shifts
New markets, new tech
Closing the opportunity gap
Example
The Internet enabled entirely new business models (eBay, Amazon, Google) that couldn't exist before.

Best Practice vs Next Practice

✗ Best Practice Benchmarking competitors
Copying industry leaders
"Smelling others' socks in the locker room"
✓ Next Practice Creating new rules
Strategy = Innovation
Value creation, not imitation

Ford vs Tata Motors

Ford (Box 1 thinking) • Took US $20K car platform
• "Adapted" for India
• Targeted existing car owners
• Only 10% of market
Tata (Box 3 thinking) • Created $2,000 Nano
• Targeted 2-wheeler families
• Creating new consumption
• 90% market opportunity!
Paradox of Emerging Markets: Mega markets with micro customers. India per capita = $800 vs US $50,000. Can't adapt—must reinvent!

P&G's 10¢ Diaper in China

P&G dominated premium Pampers (40¢) in Tier 1 cities.

The insight
Tier 3 households: no diapers, baby wets the bed. What would they pay for a good night's sleep? = cost of breakfast = 10¢
Can't create 10¢ diaper by cutting costs from 40¢. Must reinvent from ground up.

Grameen Bank

Dr. Muhammad Yunus invented microfinance by doing the exact opposite:

Commercial Banks Lend to rich
Large loans
Men, urban
Contracts, risk officers
Come to bank
Grameen Bank Lend to poor
$15 loans
Women, rural
Self-help groups
Bank goes to you
Result
Only bank that didn't need bailout in 2008! Extended to beggars—200K enrolled in 6 months, 50% became salesmen.

GE Energy

US Model (Box 1) Central power plants
Scale = low cost
National grid
Infrastructure trap
India (Box 3) Decentralized generation
Renewables
Local grids only
No legacy constraints
The twist: Whoever wins in emerging markets brings those innovations back to dominate the US!

The High Jump Evolution

100+ years of Olympics = 4 non-linear business model shifts:

Scissors (~5'2" max)
Hurdling motion. Center of gravity limits you. "Inside every org, there are lots of scissors."
Western Roll
Kick off right, land on right. Back to bar.
Straddle
Kick off right, land on left. Belly to bar.
Fosbury Flop (8+ feet!)
Dick Fosbury, 1968. Run diagonal, launch, TWIST. Head clears first—broke assumption "legs must clear first."
Why don't scissor experts invent the flop?
• Success creates traps
• Gym exercises for scissors = useless for flop
• Only analyze scissor competitors
• Discomfort being a beginner

Test Yourself

Click to reveal answers

What's the difference between Box 1 and real strategy?
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Box 1 = operational excellence (Six Sigma, efficiency). Real strategy = Box 2 + Box 3. Box 1 is performance gap; strategy is opportunity gap.
Why did Ford fail in India while Tata succeeded?
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Ford adapted US car for existing owners (10%). Tata created $2K Nano for non-consumers (90%). Can't adapt rich-country models for micro-income markets.
What is "next practice" vs "best practice"?
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Best practice = copying competitors. Next practice = creating new rules. "Don't benchmark your socks against others in the locker room."
Why are emerging markets a "customer discontinuity"?
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Mega markets with micro customers. India $800 vs US $50K. Need fundamentally different business models—creating consumption, not converting.
Why don't industry leaders invent the next model?
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Success creates traps: unlearning problem, wrong "gym exercises", myopic competitor analysis, fear of cannibalization.

Bottom Line

  • Strategy ≠ Box 1. Managing present is critical but not strategy.
  • Opportunity gap > Performance gap. Growth/innovation gap dwarfs efficiency gap.
  • Non-linear shifts need non-linear responses. Can't Six Sigma your way to future.
  • Emerging markets = future's R&D lab. Constraints force innovation.
  • Next practice > best practice. Innovation creates new games.
  • Success is a trap. Scissors skills prevent inventing the flop.
  • Future is now. What 3 projects are you doing THIS YEAR for 2030?

Personal Application

  • Box 1: Excel at current role
  • Box 2: What should you unlearn?
  • Box 3: What future are you creating?
"If you don't reinvent yourself, you die—emotionally, intellectually."