In this episode of The Committed Innovator podcast, McKinsey innovation expert Erik Roth talks with our global director of communications for the Strategy & Corporate Finance Practice, Sean Brown, about the building blocks of innovation and how they help drive sustainable and inclusive growth. This is an edited transcript of the discussion. For more conversations on innovation, follow the series on your preferred podcast platform.
Sean Brown: To start off, Erik, give us a little background on why you chose to go to Israel and what we can learn from the innovation ecosystem there.
Erik Roth: Israel has always been a special ecosystem, and people I meet as I travel around the world and advise on the topic of innovation are curious to learn about it. They not only want to know why it has existed in the way it has, but, more frequently, how they can replicate it. What makes it work, and what could be ported over to other innovation centers around the world, or even large enterprises? There’s also a lot of curiosity from enterprises themselves about how they can tap into the Israeli innovation landscape—how they can optimize their ability to benefit from the knowledge, capability, skills, and technologies emerging from this vibrant mix of extraordinarily talented individuals, and the framework that’s been set up around them to encourage entrepreneurialism, venture capital, flows, and access to the rest of the world.
Sean Brown: I could see that the number of the companies founded and built up in Israel, then sold for billions of dollars, could be providing a strong incentive for others.
Erik Roth: All you need is a few unicorns, and people say, “Wait, what happened over there?”
Sean Brown: When these innovations manifest in small companies that become unicorns that then get purchased, what happens to them? Do the tech capabilities stay in Israel?
Erik Roth: In the best-case scenario, you have the ability of a larger enterprise to acquire either the talent or the technology for these small ventures, and incorporate it in a meaningful way into their platforms. You see this in the tech space, a little bit in the agricultural space, and some in pharmaceuticals. Often those companies that acquire such start-ups are relying on that new technology to build a meaningful new business platform. The incentives are aligned.
The talent is a lot of what makes Israel special. There are many, many serial entrepreneurs in the country. On my last trip there, I met quite a few people who sold their first technology start-up and are now applying the same or similar technology to a different problem—such as a totally different way of thinking about retail, around radio frequency identification tags (RFID), or frictionless shopping. Same technologies, but now they’re doing it for big data and advanced analytics and purchase journeys.
You have this amazing talent and these serial entrepreneurs who understand a certain set of technologies and recreate them over and over for different uses. They’re in it for the creation of the technology and for the thrill of developing a new entity. That’s actually part of what I think innovation needs to be successful—to reinvent itself consistently.
Sean Brown: Would you say some of the things that have made Israel such a special place for fostering innovation have continued? What is changing in terms of the dynamics?
Erik Roth: I had the opportunity recently to visit some other areas of the Middle East where they’re grappling with how to emulate Israel’s innovation ecosystem.
The UAE has innovated a lot. For example, the concrete pump that was required to build the Burj Khalifa, the tallest building in the world, was invented for the construction of that skyscraper. The Dubai International Airport is ranked number one in international passenger traffic, so the systems for baggage handling, processing people, and moving those giant A380s in and out so seamlessly had to be created.
There’s innovation across the rest of the Middle East that already exists, and the question those countries are asking is how they can build an innovation and start-up ecosystem similar to those in Israel, Silicon Valley, or Singapore, or Shenzhen. What is it about these places that, all of a sudden, demonstrate this unbelievable burst of energy and activity around technology and innovation?
Sean Brown: And building it is one thing, but talk about the culture needed to continually innovate.
Erik Roth: In the case of Israel, it is an open and very commercially oriented place, with a combination of talented engineers and scientists coming together to address big challenges in a government-facilitated framework that allows for capital flows and seed funding for ventures.
I get the question all the time from enterprises: “How do we create innovation at scale?” It’s my favorite question. The answer is the same kinds of things Israel has done, but in a different context. It’s an environment that combines clarity around what challenges need to be solved, the tech talent to do so, and the business models or frameworks to do so profitably. Those three elements always have to be there, in my experience. Sometimes you have regulation that changes the incentives and accessibility of certain opportunities, but you still have to have those three: the clarity of the frustration you’re solving for, the technologies to create that solution, and the economics to have it scale.
Sean Brown: We’re in some pretty volatile times right now. Can you comment on the effect of volatility on innovation, and perhaps the inverse: To what extent does innovation provide resilience in times of economic volatility?
Erik Roth: I think the uncertainty of current times shifts what kinds of opportunities might be available. Let’s take the pandemic as an example. Many said that innovation was dead, that people could no longer collaborate if they couldn’t be in the office. But what happened? We actually had one of the most intense innovative periods in recent memory.
People and entities came together in a way they never had before to solve that challenge in an unheard-of time frame. We are all beneficiaries of this incredible amount of innovation in a period of uncertainty and calamity. To do it, many companies needed to rethink how they had to operate—that’s innovation. It’s really about confidence. Every innovation process, whether it’s agile, linear, or whatever, is about moving an idea or concept through a series of development and/or learning gates that get you to something you have confidence investing more in so you scale it.
In times of incredible uncertainty and volatility, it may be harder to generate the evidence to build the confidence to invest more in innovation. But you can’t ignore the context, so maybe you need to change your approach to accommodate the context.
It’s no accident that we have so many conversations these days around growth, and they’re tied to the operating model. Operating model is a fancy term for: “How do we make decisions? How do we allocate resources or reallocate them? How do we have the process in place to allow this innovation to be developed?”
Interest in these processes has increased as the volatility and uncertainty of the times have increased. It’s harder to launch successful things using standard historic processes that tend to be quite linear, when market conditions around you are so dynamic.
Sean Brown: It’s normal to feel like battening down the hatches in the face of volatility, but you often talk about the importance of keeping the focus on growth, even through downturns. Can you talk about that?
Erik Roth: In times of greatest uncertainty and economic downturns, what happens to innovation? Does the spigot get turned off? The reality is that for a lot of organizations, it does. But where it doesn’t, we find that within five to seven years, those organizations have a 30 percent valuation advantage, because they are accelerating out of the turnarounds. While this may be difficult to do for many, a downturn is the best time to invest or at least continue investing in innovation. You’ll benefit from those investments as things turn. If you miss out on that, you’re ceding ground to others.
Our recent research on growth highlighted the difference between top growers. The difference came down to setting the aspiration. The right ambition level and aspiration create room for the proper resource allocation—then having the right pathways, core and adjacencies. If you have all that in place relative to the growth you want to achieve, you outperform.
Sean Brown: How does this notion of culture connect to the eight essentials of innovation?
Erik Roth: Mobilize, the eighth of the essentials, though not least important, encapsulates a lot of the cultural elements in terms of the people, incentive systems, and development pathways we think need to be in place in a top innovator.
And culture is affected by all of them. If you have the right aspiration and ambition, that sets the tone for how an organization will act and where it’s trying to go. One of the most powerful innovation aspirations is one with a clear destination. If your employees, your enterprise, your organization don’t know where they’re headed, it’s very hard to get there. The CEOs and executives I work with are very interested in a more innovative and creative culture. We have a lot of discussions around how to set high-enough ambitions and aspirations to get the organization inspired to want to achieve something great.
It’s really about change management, especially when you’re changing the operating model, which you often need to do if you’re going to make a big cultural change and try to grow through more innovation. You have to educate people on what it is they’re supposed to do differently now that they’re in a new role or in a new growth vector. It’s through working differently that culture starts to change. This ties to the notion of psychological safety. There’s a lot of energy being put into thinking about how to make people comfortable taking risks and bringing the best of their ideas together with the best of other people’s ideas.
It’s amazing how often that doesn’t happen in an organization. There are a whole bunch of fears that come through business people who are trying to be successful. Couple that with cultures that don’t celebrate, support, and encourage psychologically safe, dynamic, inclusive environments, and we have a problem. If your company has high fear and low inclusiveness and psychological safety, you are unlikely to be an innovator.
Sean Brown: As you look back on some of the conversations you’ve had with committed innovators, which ones have had to overcome that fear and actually drive the change?
Erik Roth: They all do. But I’ll go back to the conversation I had with Tekla Back, founder of the plant-based keto snack company, Keho. She described the reality of trying to innovate in large organizations where it was more about activity and just getting it done, as opposed to content and the quality. The innovation corridors are determined by the way a company’s manufacturing assets are set up, its routes to market, and the business model itself. This can create boundaries that prevent effective innovation.
She was able to apply those lessons to starting Keho. Of course, she would be the first one to point out that it’s hard to make it happen when you’re out there on your own and you don’t have tens of billions of dollars behind you.
Another conversation I enjoyed was with Amy Brooks, chief innovation officer of the National Basketball Association. She talked about not just her own journey in the NBA of how to lead innovation and take on the roles she had, but also learning what the league did during COVID-19 to actually allow basketball to continue—and the happy accident of the Top Shot NFTs they created, which now everybody wants to replicate. They were one of the first to do them, and they did it in line with how we’re talking about taking smart risks and changing the culture.
Sean Brown: We sometimes hear of the need for an innovation cheerleader or superhero to lead initiatives, but how does that fit into innovation at scale? Do you need to have that one person who is single-mindedly focused on driving innovation, to achieve long-term innovation success?
Erik Roth: This is a great question. I think you may need that one individual to lead the charge, a CEO or an executive team or group of individuals that holds the torch, if you will. But if you can’t mobilize the organization to get it done, it’s not going to get anywhere.
This goes back to inclusiveness, diversity, collaborative models, and psychological safety. Those are all important ingredients for allowing innovation to continue and scale repeatedly. Without them, you may get a one-off success, but you’re not going to get multiple successes. And if you’re in a large enterprise, you’re going to need many big successes—not lots of little incremental ones.
You can have someone who orchestrates, who facilitates, who is creating the conditions for success. You probably need someone who’s thinking about that all day. And it’s hard for the CEO or other leaders to do that all day. But don’t put the innovation champions off in the corner in an accelerator or incubator and ask them to come up with new stuff. That’s where your desire to transform the culture, to innovate at scale, and to really change a growth trajectory will probably fall apart.
Sean Brown: We spoke earlier about the Israeli innovation culture. Do innovators like to be in a community? If so, is it a community within a company, or a community across companies? What is the broader context of the factors that foster innovation?
Erik Roth: I don’t know if there is data on this, but if there were, we might find that the best innovators around the world may not actually enjoy being in a community like you describe, but may require being part of a community to help their innovations be successful. The great innovators are on the edge; they’re challenging orthodoxies, and they’re doing things differently. It can be hard to operate in a community construct when you’re challenging its existing norms. However, the irony is that you probably can’t bring your innovation to success or scale without the community. You require others. Otherwise, your technology will stay on the drawing board somewhere.
Sean Brown: As you think back on the conversations you’ve had with innovators, what are some of the key learnings for someone who aspires to be an innovator?
Erik Roth: We need to understand that there are different kinds of innovators. There are inventor innovators who tinker on their own and come up with something completely new, and then work with others to scale it. There are manager innovators, whom you could find in a large organization, and they’re good at leading an initiative, bringing the right different resources and capabilities and skills together and marshaling them through a larger entity, and knowing exactly which strings to pull. There is the dot connector, who is good at finding the different parts of the puzzle and connecting them up. They see things that others don’t.
What they all have in common is a little bit of an insatiable curiosity to learn, a little bit of a tolerance to take risks outside the norm, and being OK with not always succeeding. And they have to be technically oriented. I think it’s very difficult to be a successful innovator unless you have the capacity to understand technology. You at least have to know enough about it, or know how to ask the right questions about it, to get really deep, because the technical aspect is actually part of the value creation engine. The best innovators also have business savvy. They understand the marketplace and customers really well. I’m a huge proponent of customer-back or consumer-centric innovation.
If you can create high-performing innovation teams that contain pieces of all of these capabilities, chances are good you’re going to win over and over again. If you can do it where the team culture is inclusive and offers psychological safety, and has a lot of diversity of thought on it, that team will be very resilient in the face of uncertainty and volatility, and whatever else it faces in trying to create and scale the innovations they work on.
Sean Brown: But is it the kind of thing where you can decide that these are some steps you’re going to take personally to try and be more open to innovation?
Erik Roth: Yes. Great innovators can be born or made. They listen a lot. They are attuned to the environment around them. One lesson I try to impart to the people I advise is to recognize the difference between assertions and assumptions.
A great innovator knows when something that’s being asserted is actually an assumption. Understanding the difference is important, because when you’re dealing with a certainty, you’re less likely to challenge it. It’s an assertion, and, therefore, you may follow it blindly and it may run you into a ditch. A great innovator will treat that same statement as an assumption, which lets them respond differently. They can say, “I’m seeing something different, and, therefore, I may take a different path.” If you’re facing something that just doesn’t look like it’s supposed to, do you just keep going? That happens in many large organizations. Or do you raise the flag and say, “Wait a minute, this isn’t right—we need to go in a different direction here”?
Then you need to be able to galvanize people. What is it that motivates others, and how can you motivate those others to come together to achieve whatever it is this innovation is meant to achieve?
Asking a lot of questions, understanding what’s an assertion versus an assumption, assessing talent and capabilities and deploying them—great innovators know how to do all this.
Of course, funding helps. But you don’t have to spend a lot of money—certainly not as much money as most organizations spend when they’re going about innovation. Our research has found that 86 percent of leaders list innovation as a top priority, yet only 6 percent are satisfied that their investments pay out in the way they should. There’s $2.5 trillion spent each year on R&D and innovation. And only 6 percent of leaders are satisfied? This is a massive, massive challenge.
Sean Brown: Thanks so much for your time, Erik.
Erik Roth: Thank you, Sean. It was a pleasure.