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Future success depends on non-linear innovation, closing the possibility gap

By Kelli Ainsworth, Editorial Coordinator

In the midst of the industry’s worst downturn since the 1980s, many oil and gas companies may be focused on today, not thinking much about the future. However, companies must balance managing the present with planning for the future if they want to become and remain an industry leader, said Dr Vijay Govindarajan, Coxe Distinguished Professor at Dartmouth University’s Tuck School of Business. “Because an organization is a leader today, you cannot assume you will be a leader tomorrow. Earning that leadership is what strategy is all about,” Dr Govindarajan said on 23 August at the Landmark Innovation Forum and Expo, hosted by Halliburton in Houston. “Strategy is always about creating your future while managing your present.”

One approach companies could take to earn their position at the top, he said, is to ensure that their current projects are spread across three “boxes.” Box one projects are focused on improving current business models. Projects that fall into this box tend to be influenced by clear signals and linear changes in the industry. “The organizational response would be incremental improvements in your current business model. Call it operational excellence,” he said. “It’s absolutely critical, but you cannot allocate 100% of your resources to improving the efficiency of your current business model.”

Resources should also be allocated to engage in projects that fall in boxes two and three, which are about abandoning the past and creating the future, respectively. Projects that fall into these boxes respond to weaker signals and non-linear industry changes and breakthrough innovations. In his experience, Dr Govindarajan said, companies tend to focus too much on box one projects and not enough on boxes two and three.

While box one projects are all about closing performance gaps and linear innovation, box two and three projects close what Dr Govindarajan calls the possibility gap. “You cannot close the possibility gap using the same principles you use to close the performance gap. You must engage in breakthrough innovation.” For instance, he said, when companies look to close the performance gap, they tend to engage in best practices benchmarking. “You ask yourself if there’s somebody doing it a little bit smarter, a little bit better,” he said. However, this is not enough to ensure leadership in the future.

To illustrate the difference between box one projects and box two and three projects, he used a metaphor from the sports world. The original technique for the high jump relied on a hurdling motion to clear the bar. In the first Olympics, in 1896, the highest jump achieved using this motion was 4 ft, 2 in. However, high jump techniques have evolved over the years, and now athletes tend to leap into the air and go over the bar headfirst. The highest jump at the 2016 Olympics was close to 8 ft – a feat that would have been impossible using a hurdling motion. Dr Govindarajan likened box one projects to a high-jumper improving their technique using the hurdling motion. They might become the best in the world at that particular type of jump, but they’re going to be limited. Companies who allocate resources to box two and box three projects are like the athletes who developed an entirely new way to get over the bar.

Dr Govindarajan advises companies to create what he calls a strategic architecture document consisting of five bullet points. The first point is potential non-linear shifts and innovations that could influence the industry. Then, the company should state its strategic intent for the future. He emphasized that this is different from a mission statement. It must be very specific, give a clear direction, motivate employees and challenge them.

The third point states the company’s core competencies. Building on that, the fourth point focuses on annual priorities and divides these priorities in three horizons. The first horizon is all about closing performance gaps. Anywhere from 40% to 60% of a company’s resources should be allocated to these sorts of projects, essentially box one projects, Dr Govindarajan said. Projects in the second horizon should push a company’s core competency into an adjacent space, and between 25% to 35% of a company’s projects should fall under this horizon. Companies should allocate 10% to 20% of their resources for horizon three projects, which rely on completely new business models. Finally, the fifth point outlines the new core competencies the company would like to develop.

Although many companies are focused on making it through the difficult present, Dr Govindarajan said, companies should try to plan for the future and the eventual upturn. “Yes, the oil and gas industry is in a downturn. But I look at you – you probably have the best talent in the world. Then I look at the possibility gap in front of your industry, and it’s huge. What are you waiting for?”

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