Innovation is considered critical to growth, but how can you achieve it? Is it a chicken and egg conundrum? Making informed growth decisions requires the right information, available capital, company capabilities, and an open mindset. In looking at innovation and growth, what can we learn from companies that have successfully achieved both?
A recent piece from McKinsey highlights a five-year study they conducted with 650 public companies between 2016 and 2021. In it, they found 53 organizations that outgrew their competitors and were deemed more innovative. Across ten industries and four continents, McKinsey found several shared best practices that can provide a blueprint.
Unsurprisingly, these innovative, growing companies perform better than their peers. Over the decade from 2012-2022, their total shareholder return was higher than the industry median, and the median excess return was 11 points higher than the Global 2000 companies.
According to the study, “Two-thirds of the innovative growers were in the top quintile of the economic-profit power curve, which represents the distribution of economic profit among Global 2000 companies. Their presence on the high end of the curve is not surprising: McKinsey research on the power curve points to the importance of making big innovative moves to beat the market, including programmatic M&A, dynamic reallocation of resources, and differentiating product and process improvements. In fact, the research suggests making no moves is a dangerous strategy—one that brings stagnation and underperformance.”
So, what makes these companies different? The article states, “Specifically, they build innovation into their overall strategy aspirations. They activate critical growth pathways within their core businesses and enter only those adjacent markets where they have the strongest competitive advantage. They pursue excellence in execution and invest in key innovation capabilities. And they use M&A, particularly programmatic M&A, to extend their innovation reach.”
Aspire: Link innovation to growth aspirations
Those companies committed to innovation as part of their growth mention the term more than twice as much as their peers during earning calls and tie it to their ability to create profitable and sustainable growth. It’s essential to build a culture of innovation with employees. McKinsey notes, “Innovative growers frequently voice their commitment to investing more resources in talent and digital capabilities, and they are almost three times more likely than their fast-growing but not innovative peers to frame their efforts as a “transformation.”
Activate: Pursue multiple pathways to growth
The research found that these companies succeed in their core business and when entering adjacent markets. In both cases, they find 2x results compared to their competitors. The success is tied to the decisions they make on where to expand. Per the study, “They do this by entering adjacent business areas where they can connect to one or more clear opportunities to create value, such as customer-driven growth, capability-driven growth, value chain–driven growth, or business model innovation in areas such as digital and sustainability.”
Execute: Invest productively in all innovation capabilities
Investments are made across the organization, providing an additional five points of excess gross margin versus Global 2000 companies, indicating product differentiation. Their investments in research and development provide more tangible outcomes than their competitors. When looking at patents, over the past twenty years, they were awarded more than three times as many strong patents as their competitors.
Extend: Cultivate a strong M&A capability
These companies stand out in their merger and acquisition capabilities as well. The study found, “Innovative growers routinely define their growth and M&A objectives up front, and leaders come to a shared understanding of the types of deals they want to target, which allows innovative growers to act with speed and purpose when M&A opportunities come up. What’s more, innovative growers are 50 percent more likely than peers to follow a programmatic approach to M&A, which McKinsey has repeatedly reaffirmed is far more likely than other M&A approaches to lead to stronger performance and less risk.”
If you’re not focused on innovation, you are likely missing out on growth opportunities and the ability to create lasting value. Making innovation a key element of your decision-making and business strategy will help start a culture of innovation with your employees. It will take time and attention, but the effort may provide new growth opportunities.
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