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Leading Off
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Edison. Curie. The Wright brothers. Discoveries from these and history’s other great innovators have propelled the world forward into new eras of science, technology, and commerce. While not all innovation happens on a scale as dramatic as the changes driven by these examples, even an organization’s day-to-day advances call for an environment that fosters new ideas and is attuned to a rapidly changing business landscape. This week, let’s explore what it means to develop an organizational muscle for innovation and how to measure its impact.
human head
Build a system based on the essentials
By and large, well-established companies tend to excel at executing but not always at innovating. A focus on essentials can help. That’s what McKinsey experts did using research, interviews, and surveys of more than 2,500 executives from more than 300 companies across industries and geographies. Their findings: implementing eight essentials for innovation can have an outsize impact on a company’s innovation success. Our research shows that mastery of these essentials has led companies to higher performance, including 2.4 times higher economic profit.
Innovation “winners” excel in two areas in which leaders play an important role: setting bold but plausible innovation goals grounded in economic value and making difficult resource-allocation and portfolio decisions. Developing and cultivating an organization-wide operating model rooted in the eight essentials can help break people out of their comfort zones, spur more consistent innovation initiatives across teams, and provide visibility and accountability for ongoing projects.
That’s how much more “through-cycle outperformers” are generating in total returns to shareholders following a downturn compared with their peers. In other words, companies that continue to invest in growth and innovation initiatives throughout a downturn fare better, both during and after recovery, than those that play it safe. This pattern has repeated throughout history, including in the aftermath of the 2008 financial crisis. The lesson? Being bold and innovative, focusing on new growth instead of only weathering the storm, can help your organization stay well ahead of competitors for years to come.
Mastering innovation requires distilling problems to their core, says Lai Chang Wen, CEO and cofounder of Ninja Van, an express-delivery company with operations across Southeast Asia. “Whenever we build a product, such as a database,” Chang Wen explains in a recent episode of McKinsey’s The Venture podcast, “we always ask ourselves, ‘This might look like the solution. But is there a more fundamental, more core way of building this?’ That way, it can more easily be adapted to other uses thereafter.” This mindset has helped the company thrive by committing to continuous and relentless innovation. The approach mirrors how Moderna CEO Stéphane Bancel says the company navigated COVID-19-vaccine development during the pandemic: the company’s innovative mRNA technology led to faster product innovation, generating a vaccine in 11 months, and that same technology has the potential to transform the way we address infectious diseases in the future.
“Too often we see the debate around innovation R&D portfolios resting on how much gets invested against each project and budget cycles as opposed to what kind of a return is going to be generated by those investments.”
That’s McKinsey senior partner and innovation expert Erik Roth on the importance of measuring innovation. This doesn’t mean counting the number of patents your company has produced. Rather, there are two simple conversion metrics that can be calculated from data that many companies already track: the ratio of how R&D spending converts into new-product sales and the ratio of gross margin to new-product sales. How do these ratios help? They don’t just focus on the inputs, or “upstream” activity; instead, they focus on the portfolio level and meaningful profit. These measures of performance can help you determine if all the time, energy, and capabilities devoted to your company’s innovation efforts are leading to what you ultimately seek.
ink spilled on paper
Many iconic inventions have incredible—or even mundane—stories behind them. For instance, Post-it Notes were inspired by pieces of paper falling out of the choir book of 3M scientist Art Fry (he had been using the paper to mark hymns). While not every creative spark comes from something so familiar and easy to grasp, telling a good, accessible innovation story—one that will motivate people, inspire commitment from them, and, above all, get great ideas noticed—is still critical. In a classic McKinsey Quarterly article, Julian Birkinshaw, a professor of strategy and entrepreneurship at London Business School, describes how appealing to people’s feelings can help innovation ideas cut through the clutter. Explore how these story tropes, ranging from “best beats first” to “master of reinvention,” can help tap emotions and attract the attention of investors and other stakeholders.
Lead innovatively.
— Edited by Dana Sand, an editorial production manager in McKinsey’s Cleveland office
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