Part 1 – Companies committed to innovation have a 2.4x better profit performance

Have you ever had to prove or justify your spending on innovation? Research by McKinsey shows that a high commitment to innovation is correlated to 2.4x better financial performance. In the following weeks we will explore how you can take the first steps towards achieving it.

January 26th, 2021

In times of financial hardship, companies react differently. While some press "pause” when it comes to innovation, others press “play”.  A survey by McKinsey among 200 organisations across a variety of industries shows that 90% of executives expect that the current Corona crisis will fundamentally change their business over the next 5 years. However, only 23% put innovation as their number 1 or 2 priority compared to 55% pre-crisis. The survey shows that the majority of companies are thus putting a halt to their innovation effort and instead shift focus on short-term issues. Pressing “pause” reflects an underlying belief that innovation is not a business-critical activity. This could prove fatal on their performance in the long run. 

The ability to develop, deliver and scale new products, services, processes and business models rapidly is a muscle that all organisations need to exercise and continuously strengthen to be successful in the long run. In fact, historic data suggests that companies that invest in innovation through a crisis outperform peers during the recovery. It is therefore more important than ever to be persistent and keep on investing in innovation.


Those who are able to master at least five of the eight innovation essentials perform 2.4x better on financial performance than their peers who just muddle along. “

 

 

What characterises committed companies? 

In the McKinsey Quarterly of October 2019, the authors identified eight innovation “essentials” - a collection of attributes and behaviors that appeared to underpin superior innovation performance. Over the course of the last 7 years they validated them by studying more than 175 companies. Their analysis showed that those who are able to master at least five of the eight innovation essentials perform 2.4x better on financial performance than their peers who just muddle along. Each of the eight identified essentials of Innovation requires practices that must be mastered by the leaders of the company. 

Over two decades, Nosco has supported companies and organisations in strengthening their innovation effort and implementing new methods. Our digital platform and process underpins six of the eight essentials, and offers new best practices for a digitised world.

In a series of short articles, we are going to take a deep dive into each of them, but for now, here are the eight innovation essentials in short: 

 

1. Aspire

Regard innovation-led growth as absolutely critical and set cascaded targets to reflect this. The link between Aspire and choosing the right ideas is crucial, as it is virtually impossible if there is no aspiration or direction.

2. Choose

Invest in a coherent, time-risk balanced portfolio of initiatives with sufficient resources to win. Innovation, at its heart, is a resource-allocation problem. The pull from resources from the performance and operation zone of the company is powerful. We have developed practices that involve the resource owners in creating a time-risk balanced portfolio. Combined with defining an incubation zone it provides some protection from the forces of the other zones and the demands that they are trying to deliver on.

3. Discover

Have actionable and differentiated business, market, and technology insights that translate into sourcing ideas within the aspiration or the “search fields”. Have quick processes and methods in place that connect discovery with evolving the best ideas into possible winning value propositions. A digital platform that guides the discovery process is indispensable in discovery as it efficiently delivers the data needed to measure performance.

4. Evolve

Create solutions that provide defensible, robust and scalable profit sources. A structured maturation framework, that evolves the idea from the abstract to the investable is essential to judge if it is indeed viable. Can it be defended? Can it be scaled?

5. Accelerate

Launch the chosen ideas quickly and effectively. At its heart innovation is all about testing, learning and adapting and being able to do it quickly. Many larger companies experience “frozen” innovation pipelines. A new idea needs to wait for something to leave the pipeline. That prevents any form of acceleration. Acceleration is not only about having a structural framework that focuses on moving forward fast but also the ability to quickly kill ideas that have no market validation. Preventing clog up the pipeline and prevent new ideas to enter.

6. Scale

Once the idea has evolved or matured into a validated business, the company needs to scale it so that it can benefit from size. From having validated the ability to sell one, they need to move to selling many.  This involves a blueprint for how to pick the right market and segment and how to secure a supply chain and operation practices that can follow the increased scale.

7. Extend

Win by creating and capitalising on external networks. Intellectually, it’s easy to accept that if one could source ideas from the external network of partners, suppliers, universities, start-ups and customers it could benefit the company.  Reality is different. It requires a massive shift in the mindset of the company. From the secrecy of R&D to the protectiveness of IP and legal.

8. Mobilise

Ensure that your people are motivated, rewarded and organised to repeatedly innovate. Create a culture of Innovation and make Innovation everybody's business. This is not only about engaging the employees but also to provide an infrastructure where they can contribute and where they are recognised for their contributions.

If you want to reap the benefits of innovation, you need to first and foremost start by committing to it. If you want to outperform your peers with 2.4x stronger financial results, you need to continuously invest in improving the practices for all eight essentials. It’s a bit like fitness. If you want to get better, you need to start building a habit of exercising regularly. However, if you stop training, your fitness level goes down and once you are out of shape, it takes way longer to be back on track. 

Over the course of the next couple of months we will deep dive into each of the innovation essentials and will share our experience on how to strengthen them through practice. So stay tuned. 

 

Sources

“Innovation in a crisis: Why it is more critical than ever”, McKinsey, July 2020

“The innovation commitment”, Daniel Cohen, Brian Quinn, Erik Roth, McKinsey, October 2019