'Innovation' is one of those words that has become somewhat overused. Much like 'unique' and 'bespoke', 'innovation' has been hijacked by marketers. It is littered across corporate mission statements and annual reports without much substance.
However, those who are genuinely 'committed innovators' (as named by McKinsey) outperform their peers. In this article, we delve into research from the global management consultancy, which notes that innovation "leaders generate twice as much revenue growth from innovation as others do", to find out how.
The strategy behind business innovation
According to McKinsey, the heady heights of innovation are underpinned by fairly mundane but precise practices. They said: "setting high but achievable aspirations and supporting them with clear resource allocation choices".
This won't come as a surprise to any marketers, CMOs or business leaders used to setting strategies for business objectives. However, doing this is a somewhat more complicated and disciplined exercise than knowing it. Sustaining innovation at scale as a business grows also presents new challenges for business leaders.
The steps to business innovation identified by McKinsey can be broadly categorised as:
- Aspire: define an ambitious but achievable vision and goal
- Evolve: with the development of differentiated business models
- Accelerate: work quickly to beat the competition
- Scale: rapidly commercialise innovations
The notable difference in the most successful businesses is that they don't just set the goal; they take these practical steps to put them in motion.
Innovation in action
Innovation leaders "demonstrated their dexterity amid the business upheaval caused by the COVID-19 pandemic, not only using innovation as a launchpad out of the crisis", and in doing so, changed the landscape entirely.
In practice, one of the key elements to making innovation truly work for a business is knowing how to scale it as the business grows. Innovation must be tied into a growth strategy so companies can act quickly as soon as possible. This ties back into the mindset shift amongst committed innovators - that innovation is a practical action rather than top-level theory alone.
"committed innovators recognise that successful innovation must be carried out at scale: 70% of them report executing large-scale rollouts of new products, services, or business models over the past five years. That is nearly twice the share among less committed innovators, which focus most intensely (and report the strongest scores) on discover, suggesting that they still view innovation as largely an ideas problem."
It's significant that in building new businesses, "54% [of companies] fail to reach even $1 million in sales, and fewer than one in five gets beyond $50 million."
Innovation and disruption
Businesses' response to disruption was also a key differentiator amongst the most successful business innovators. Those that used periods of crisis to prioritise growth and innovation tended to leap forwards ahead of competitors who hunkered down until the storm passed.
We have already noted the advances made in the pandemic amongst leading innovators. It's a notable truth in many areas that while it's easy to ride high when everything is going well, significant advances are usually made in a period of flux when there are winners and losers.
There is a tangible history of disruption driving evolution - we saw the emergence of the gig economy following the financial crisis of 2008, for example. This has been enhanced by a considerable shift in digitisation, working from home and hybrid working models, all in the wake of the pandemic. Both evolutionary moves have given rise to new businesses (Uber) and a higher degree of self-employed individuals. The IPSE - the largest association of independent professionals in the EU - notes: "The overall solo self-employed population has grown by 35% since 2008".
Through these evolutions, businesses that embrace change and innovation have been able to reduce their commitments to large, expensive office spaces and have capitalised on both favoured ways of working. For example, they can tap into a skills ecosystem when they need specific functions filled, thereby reducing ongoing overheads.
Thinking about business innovation differently
Perhaps one of the most significant points made by McKinsey is the mindset shift around what innovation means. They quote one CEO who notes his ah-ha moment came "when I stopped thinking that innovation equals products. It can be so much more."
Thinking about innovation differently can entail:
- Redefining customer categories to open up new opportunities
- Reframing products based on information that you have over preconceived ideas (Slack abandoned its aspiration to be a gaming company when it recognised that the chat feature in its failed first product held more promise)
- A willingness to act boldly but not rashly based on evidence and to link business structure changes with ideas and business direction.
- Constantly reevaluating your place in the value chain to spot and get ahead of trends (Netflix pivoting from DVD rentals to video streaming and now, content creation.
- Committing to looking for new customer and market segments (Goldman Sach's move into the B2C banking sector with the launch of Marcus in 2021, which is now growing at 50% a year
While innovation conjures images of those overused phrases 'out of the box' or 'blue sky' thinking, what's notable is that businesses that diversify still tend to move into spaces they are familiar with and highly capable at. i.e., most expand into adjacencies closely related to their core businesses, and the consequent likelihood of financial success is double.
McKinsey says: "Diversification is most likely to create value when it uses assets and capabilities closely adjacent to a company's existing ones", and those that do are "twice as likely to generate excess shareholder returns as companies expanding further afield."
Reducing business risk
In line with that, perhaps, there is a notable emphasis on reducing risk. The most successful innovators are not gamblers - they're risk spreaders and managers. The goal through innovation and diversification is business growth, but it is also about limiting risk.
The practical process through which they approach innovation reflects their inquisitive nature - learning is at the heart of the strategic development and implementation process. There's a willingness to pivot and evolve because the goal isn't to prove a hypothesis correct but to minimise risk and improve business outcomes. As a result, they identify critical risk areas and encourage experimentation to minimise them.
Creating an innovation strategy
What's interesting from McKinsey's report is that there's a clear line between strategy, tech enablement and optimising the use of digital, advanced analytics for business innovation. The capacity to be agile is woven into the structure of a business and its team - perhaps outsourcing repetitive tasks, for example, to enable an organisation's ability to evolve and adapt quickly.
For established businesses wanting to compete in this rapidly changing world, it's almost impossible to look at themselves from the inside and reflect on the changes and opportunities that might benefit them going forwards. This is where an outside perspective can pay dividends, helping you to analyse your current market, evaluate your capabilities, establish opportunities based on data and analysis and implement a playbook with the flexibility to move with a changing market.
What to turn your business into a committed innovator?