The 8 Essentials of Innovation
By Erik Roth, global leader of McKinsey & Company’s innovation practice
Creating a one-off business success is something most organizations can do — what’s harder is maintaining a pipeline of successful innovation initiatives. The global leader of McKinsey’s innovation practice sheds light on how to produce ongoing innovation success.
Innovation is one of the most widely used, yet misunderstood terms in business today. It’s easy to find evidence of the confusion — starting with the annual lists that rank the most innovative companies. The same names tend to float to the top year after year, yet the lauded organizations innovate in fundamentally different ways. Take Apple: It’s a company heralded for its design and meticulous control of almost every aspect of its product, supply chain and customer experience. Google, on the other hand, invents a lot but its profit comes almost entirely from search. In fact, most of Google’s familiar brands (Android, Gmail, Maps) were acquisitions rather than in-house innovations, used to reinforce the search business. Given these significant differences, can these companies’ innovations be measured on the same scale?
My definition of innovation is the ability to generate value meaningful to an organization’s long-term performance from a continuous stream of new products, services, processes and business models. Almost any organization can create a one-off success; what’s hard is maintaining a pipeline of successful innovation initiatives. When McKinsey polled global senior executives recently, 84 percent told us that innovation is extremely important to their organizations – but only 6 percent are satisfied with their performance on this front.
So what does it take to innovate repeatedly and at scale? It starts with the “will” but must be matched with the “skill” to make it happen. The “Eight Essentials of Innovation,” based on McKinsey’s in-depth work with more than 600 companies and interviews with 2,000 others, represent the core factors that produce ongoing innovation success.
8 steps to building an innovation engine
- Aspire: While a far-reaching vision is vital, inspirational words must be supported by concrete innovation metrics. Organizations that set targets for innovation’s contribution to business growth — linked to broader strategic goals — have an approximately 50 percent greater chance of innovating successfully. Say you map out where you want to be in five years — how will you get there? If your plans show that gains in your core business’s market share, combined with acquisitions, can achieve your goals, there is no incentive for your team to make risky innovation bets. If you aspire to a large growth target, you may need to push the organization to reach beyond incremental innovations to ones that have potential to open new markets beyond the core — and allocate sufficient resources (both funds and people) to make such efforts feasible.
- Choose: Scarcity of new ideas is rarely a problem for companies; the struggle lies in determining which ideas present the biggest growth opportunities. Making good decisions on what to pursue requires first figuring out the value, timeframe and risk level of the innovation needed to reach the target to which you aspire. Then, like any good investor weighing risk, you should construct a portfolio that reflects the agreed-upon risk and reward ratio — something that surprisingly few companies do. A well-managed portfolio of initiatives allows you to see how the organization is progressing toward its goals and enables management to make adjustments when projects are either more or less successful than anticipated.
- Discover: Every great innovation occurs at the intersection of a valuable problem to solve, a technology that enables a solution and a business model that delivers the solution profitably to the target customer. Successful innovators focus on gathering insights that address all three lenses on the market, something that requires a blend of creativity, design and science. A good starter when seeking an innovation focus is to ask yourself, “Where are the biggest points of frustration for my customers and partners?”
- Evolve: When most of us think of innovation, we think of new products. In an era of accelerating digital disruptions, however, it’s new business models that drive the biggest changes. Organizations increasingly face competition from nontraditional sources as digital upstarts ride new business models into sometimes unexpected markets (think how smartphones sideswiped cameras). In this environment, companies need to make sure their innovation portfolios don’t focus solely on physical products or “tangible” services but also include business models that could redefine the way a market operates. You also should frequently reevaluate how you fit into your supply chain and combat narrow conceptions of what your business is and does.
- Accelerate: Bureaucracy stifles innovation. While cross-functional collaboration is important, it cannot get in the way of agile processes that enable you to bring promising ideas to market fast enough to beat competition. Make sure you have people with the right skills and experience involved at each critical decision point and that those decision-makers have the appropriate depth and breadth of information to make confident decisions.
- Scale: Go big or go home — well, almost. The key is to calibrate investments to match the size of the opportunity. Organizations need to hone the ability to judge the potential magnitude and reach of an innovation and then assign the right amount of resources to its pursuit. No need to go overboard on a small idea; however, there’s no greater regret than underinvesting in — and missing out on — a big one.
- Extend: No individual or organization is capable of all the best insights and technologies. Staying abreast of today’s innovation pace requires collaboration with ecosystem partners — not just in sourcing new ideas but in sharing costs and finding faster routes to market. Putting in place systems to open your innovation efforts to customers, partners and other potential collaborators — through crowdsourcing, co-creating technology or partnering to access hard-to-reach markets — can help you create and capture an advantage.
- Mobilize: Creating a culture of innovation is not easy, as many leaders know. You need to know what the end point looks like and develop a sequence of interventions to teach employees how to shift from the way things are done today to more innovative behaviors. Innovation requires people to do something they have not done before, often at a risk to their own careers, so they need to be not only encouraged but rewarded for taking such risks — even when the bets don’t pay off. Teams should feel they have permission to take on innovation challenges and learn from failures. Only then will innovation become embedded into your cultural DNA.
This article allows only a cursory exploration of the more than 100 competencies that go into the eight essentials. While seemingly daunting, the reward is well worth it: Organizations that demonstrate at least seven of the eight innovation essentials are 63 percent more likely to become top innovation performers in their sectors. However, you can’t be impatient: Turning your company into an innovation engine is a multiyear effort and one that has to involve most parts of the organization.
This article first published in the November 2016 issue of YPO’s “Ignite” magazine.
Erik Roth is the global leader of McKinsey & Company’s innovation practice. He is a leading expert on innovation-related growth and has worked with organizations around the world and across the industry spectrum. You can read more about the “Eight Essential of Innovation” at http://bit.ly/1RiugQL or listen to a podcast at http://bit.ly/29AvJFe.
Keep up with the latest trends in innovation by taking part in the second YPO Innovation Week, set for 8-12 May 2017.