Relatively few organizations can demonstrate that they have a rigorous process for delivering sustainable innovation-driven growth. Yet most corporate mission statements and annual reports are littered with the word “innovation.” In 2019, we described the practices innovation leaders embrace—practices that help those companies outperform. Our research revealed that two in particular, setting high but achievable aspirations and supporting them with clear resource allocation choices, distinguish committed innovators1 from companies at earlier stages of the innovation journey.
Since 2019, through years of unprecedented global disruption and uncertainty, innovation leaders have taken their commitment to a whole new level. They demonstrated their dexterity amid the business upheaval caused by the COVID-19 pandemic, not only using innovation as a launchpad out of the crisis, but also significantly improving their mastery of the eight essential practices required to sustain innovation at scale (see sidebar, “The eight essentials of innovation”).
In the process, they have changed the innovation landscape. Previously, a deep focus on the practices aspire and choose was enough to separate innovation leaders from the pack. But now, committed innovators deploy operating models that extend comprehensively across the eight essential practices. By developing differentiated business models (evolve), working quickly to beat the competition (accelerate), and rapidly commercializing new innovations (scale), the leaders generate twice as much revenue growth from innovation as others do.
A deeper level of commitment
From 2016 to 2021, we compared the mastery of the eight essential innovation practices at more than 1,600 organizations. We found that the bar is rising: in the latest survey, 38 percent of the respondents report top performance on innovation, compared with 30 percent in 2016. Although many organizations improved modestly over the past five years, the overall increase was driven primarily by innovation leaders, which pulled further away from the pack.
Committed innovators have improved across most of the essential practices, while the rest of the field largely remains at a standstill. As in our earlier surveys, the biggest gap between the leaders and all others was in the practice aspire, which successful innovators use to define their vision and goals. Since 2016, however, disparities have grown significantly in the three essentials that even some leading innovators found challenging in the past: evolve, accelerate, and scale (Exhibit 1).
This widening gap largely reflects the way companies respond to disruption. As we discussed in previous research, organizations that prioritize growth and innovation during crises tend to leap ahead of competitors that retrench. Executives at these leading innovators have higher ambitions for achieving innovation, making bold bets, and building successes patiently. That mindset is reflected in the ability of these organizations to embrace new business models in response to changing dynamics (evolve) and to do so quickly (accelerate). In addition, committed innovators recognize that successful innovation must be carried out at scale: 70 percent 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.
How can organizations generate, prioritize, and transform promising concepts into new models that evolve their businesses? How can they do so rapidly while ensuring that initiatives reach scale? On those questions, committed innovators have much to teach us.
Committed innovators are evolving their businesses
The evolve practice pertains to the way organizations ensure that their ideas have an impact by creating defensible, robust sources of renewal. New business models have long been among the innovations that emerge from major economic dislocations. Just over a decade ago, for example, the 2008 financial crisis gave birth to the sharing economy as companies seized the opportunity to use idle assets. As we emerge from the disruption of a global pandemic, waves of new businesses, skipping generations of development in a matter of months, have arisen to serve consumers and organizations by taking advantage of new technologies.
Committed innovators are evolving (or even transforming) their business models. The CEO of one such company described his “ah ha moment”: “it’s when I stopped thinking that innovation equals products. It can be so much more.” Other committed innovators evolve their businesses by reframing the competitive landscape, finding new markets, and using their distinctive advantages.
Reframe the competitive landscape. Historical definitions of industry and customer categories can blind companies to untapped opportunities. As the boundaries separating sectors and business models increasingly blur, committed innovators recognize the need to redefine the competitive sphere. In our survey, 61 percent of the executives of these companies described their strategic posture as “industry shaper,” compared with just 21 percent of other respondents.
Business history is replete with examples of organizations that famously embraced disruption to move in new directions. Recently, Slack abandoned its aspiration to be a gaming company when it recognized that the chat feature in its failed first product held more promise. All successful reframes have one thing in common: a commitment to act boldly in the face of resistance and inertia from proponents of entrenched business models.
Critical to such a reframing is the embrace of the structural changes transforming industries. Companies that reframe themselves must often shed orthodoxies that were responsible for past success but now create constraints. Committed innovators are more than four times more likely than other companies to reevaluate their place in the value chain constantly. That enables them to spot and get ahead of new trends and to develop new offerings (Exhibit 2).
Netflix may be the most famous example of a company that embraced the coming demise of its business model (DVD movie rentals), by pivoting first to streaming video and later to content creation. Similarly, many companies in the energy, chemicals, and agriculture sectors are now disrupting their legacy businesses by adopting the sustainability imperative: for example, multiple leading petrochemical companies are shaping new processes that use greenhouse feedstocks to create new classes of sustainable and biodegradable plastics. These ventures could transform the structure of the traditional petrochemical-based plastics industry.
Explore new spaces. Committed innovators always look for new customer and market segments. Their executives are four times more likely to agree strongly that they constantly seek novel sources of profit and are five times more likely to have portfolios of innovation projects that could significantly diversify their revenues. It’s important that they spend 1.8 times more on potential breakthrough innovations than other companies do (Exhibit 3).
Consider the experience of Goldman Sachs, historically a purely B2B financial-services player. In 2016, the firm’s leaders saw growing digitization as an opportunity to launch the company into consumer banking. By the beginning of 2021, Marcus by Goldman Sachs, a fintech start-up offering personal loans, high-yield deposits, and credit cards to consumers, had $97 billion in deposits; plans call for $125 billion by 2024. Marcus represents less than 5 percent of the revenue of Goldman Sachs, but the new business is growing at 50 percent a year—and it doesn’t cannibalize the rest of the firm’s portfolio of services. In addition, Goldman’s business launch initiative, Accelerate, is creating a pathway for intrapreneurs (internal innovators) to start new technology-enabled ventures.
Diversification is most likely to create value when it uses assets and capabilities closely adjacent to a company’s existing ones. Our research on 5,000 publicly listed companies shows that those which expand into adjacencies closely related to their core businesses are twice as likely to generate excess shareholder returns as companies expanding further afield.
Leverage distinctive advantages. Large enterprises should explore their opportunities with a clear sense of the unique capabilities and assets they can use to win in those new market spaces. Leveraging existing advantages lets committed innovators use their sources of distinctiveness to give themselves a greater assurance of success. Other companies, by contrast, are 50 percent more likely to regard uncertainty as an impediment to innovation. That slows down their moves to achieve it and cues a more fearful approach.
In retail, for instance, vast footprints of physical stores have proved a burden to many, but innovative leaders use these stores to their advantage. Best Buy has long been at the forefront in this respect. Its network has served as a foundation for its evolution to omnichannel, with curbside pickup available nationwide, and more than 300 of those locations acting as microfulfillment centers to economically serve growing digital demand. It has also long used its stores to effectively explore new spaces, including its highly successful Geek Squad services business and, more recently, its exploration of Best Buy Assured Living, a subscription service for at-home eldercare using smart-home technology. Drugstore retailers, too, have found innovative ways to leverage their robust networks, such as Walgreens’ scaling up of its in-store full-service clinics, which are primed to deliver more than $4 billion in revenue to the retailer in 2022.
Committed innovators view uncertainty as an impetus to learn, not as a risk.
Committed innovators are accelerating while reducing the risk of innovation
As pressure mounts for companies to uncover new sources of growth, some hastily push innovations that fall short of their full potential. When the uptake disappoints, these companies equate disappointment with failure. Moving quickly and limiting the risk of suboptimal offerings may seem incompatible, but need not be. Committed innovators view uncertainty as an impetus to learn, not as a risk. By first focusing their development efforts on the most significant sources of uncertainty, they lower the level of risk even as they move quickly. Innovation leaders are twice as likely to use rapid testing methods during every step of innovation. They embrace the idea that, as one executive put it, “nearly every door is a two-way door”—an agile development philosophy that accepts a high level of pivoting.
How do committed innovators keep every door open? They apply a structured development approach that focuses on learning quickly, constantly testing and iterating, and applying technology to accelerate progress. Their teams don’t aim to prove that their ideas are “right” but instead treat these ideas as starting points on a journey toward value creation at scale.
Focus development on the areas of greatest uncertainty. The traditional waterfall development process follows a standard set of linear steps and anchors for activities. In this way, it applies the same success metrics to very different types of innovations. For highly uncertain innovations, however, significant risks could lie anywhere in the standard time line.
Innovation leaders identify and prioritize those critical risks and focus on understanding them. First, for each innovation project, these companies set a North Star goal to establish a clear sense of what they are trying to achieve, crystallized as revenue or profit targets. Then they deconstruct the underlying assumptions, prioritizing the most critical and uncertain ones. Finally, committed innovators build agile testing plans and then rapidly evaluate, refine, and repeat.
Too often, organizations forgo scale for speed, which should be a means to an end, not the end itself. Successful innovators not only move quickly to understand the risks they face but also focus on understanding the business models that sustain innovation. They derisk their portfolios by quickly cutting initiatives that lack a realistic path to scaled-up profit, and they are not afraid to change other initiatives by using the learning they accumulate.
Emphasize testing and constant iteration. Committed innovators are three times more likely than other companies to encourage experiments throughout the organization, our research reveals. Less mature innovators are nearly twice as likely as committed ones to cite the lack of a risk-taking culture as a top impediment to successful innovation.
Adopting a mindset embracing experimentation is critical not only at the team level but also in the overall enterprise and in the governance of innovation. Conversations of executives with project teams should not be limited to funding approvals; rather, they should balance resourcing with a willingness to challenge assumptions and take smart risks.
Embrace digital tools. This element includes collaboration tools as well as the broader application of technology and analytics to accelerate testing, prototyping, and commercialization. On average, committed innovators use digital tools twice as often as the rest of our survey sample (35 percent of these other companies use almost no digital tools to enable innovation). Gaps are particularly apparent in the application of artificial intelligence (innovation leaders use it 3.2 times more often) and advanced analytics (almost three times more often). These are cornerstones of an organization’s ability to identify and advance the most promising ideas quickly (Exhibit 4).
Committed innovators focus on scale
Our 2021 report on building new businesses found that a majority of companies struggle mightily with them. A staggering 54 percent fail to reach even $1 million in sales, and fewer than one in five gets beyond $50 million.
Committed innovators know that marshaling the right resources in sufficient quantities and at the right times is critical to a successful launch of new offerings. Most organizations think about the sales and marketing investments their innovations will need to reach scale, but less mature innovators tend to stop there. This suggests that many companies remain stuck in the discover stage, overlooking the hard work required to realize innovation at scale—or, worse, intentionally delaying that work until an idea is proved.
Committed innovators don’t fall into this trap: they keep scale in mind from the start, even as they evolve and accelerate initiatives. More than two-thirds of leading innovators say they can execute a rapid, large-scale rollout of new offerings that show promise, compared with just 42 percent of other companies. Seventy-three percent of innovation leaders say they can deliver new products or services at the desired volume and quality, compared with just 48 percent of other companies. It’s no surprise that committed innovators generate twice as much of their revenues from new products and services.
Leadership in innovation requires a commitment to an operating model based on it. Organizations that hope to catch up to the leaders must stop treating innovation as a product game and instead evolve new business models. They should also take a more iterative approach to development and make scale a requirement from the start. Even committed innovators have room to improve, but the volume of innovation during the recent crisis shows that companies can overcome even the harshest challenges if they have the right practices in place and believe that innovation matters.