Here is an excerpt from an article written by Matt Banholzer, Rebecca Doherty, Alex Morris for the McKinsey Quarterly, published by McKinsey & Company. To read the complete article, check out others, learn more about the firm, and sign up for email alerts, please click here.* * *
In this current era of competing priorities and endless disruption and uncertainty, we know that innovation remains a must-have, not just a nice-to-have, when capital is readily available.1 We also know that making a conscious choice to grow and supporting that choice with the right mindsets, development pathways, and capabilities can yield superior shareholder returns.2 But what is the role of innovation in growth and vice versa?
To find out, we identified and analyzed about 650 of the largest public companies that achieved profitable growth relative to their industry between 2016 and 2021 while also excelling in the essential capabilities associated with innovation.3 Some of these companies outgrew their peers, others were more innovative than competitors, but 53 companies managed to do both. The 50-plus “innovative growers,” as we call them, are a diverse group, spread across four continents and ten industries. They include renowned brands with a trillion-dollar market capitalization as well as smaller companies that are just starting to make a name for themselves, some as young as three years old (see sidebar, “Where do innovative growers come from?”).
For all their diversity, these companies consistently excel in both growth and innovation—and they share a number of best practices that other companies can learn from.
Do innovative growers perform better than others?
In a word, yes.
Most of our innovative growers achieved total shareholder returns (TSR) above their industry median between 2012 and 2022 (Exhibit 1). The median excess annual shareholder return among these 50-plus companies was 11 points higher than that for Global 2000 companies. What’s more, 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.4 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.
What sets innovative growers apart?
The numbers speak for themselves, but when we examined how innovative growers were achieving such a high level of performance, we observed that all demonstrate a mastery of the eight essentials of innovation, which our past research shows are correlated with strong financial performance.
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
According to our research, innovative growers unfailingly put innovation at the center of strategic and financial discussions, thereby signaling its importance to the growth and health of the organization. For instance, our review of the innovative growers’ earnings calls reveals that they talk about innovation twice as much as their peers5 and, in those conversations, emphasize innovation as a means to create profitable and sustainable growth. This is consistent with our previous research on “courageous growers” and the importance of cultivating an innovation mindset among employees.6 Innovative growers communicate to employees achievable aspirations and clear targets to reduce fears of failure, criticism, and negative career impact that often hold back innovation. Innovative growers share frequent progress updates and success stories to inspire and motivate teams and investors. What’s more, 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.”
High digital aspirations. Digital transformation was the impetus for innovation at one leading retailer among our innovative growers: the company sought to increase its online sales by introducing new features such as faster mobile checkout and an app with augmented reality built into it so customers could visualize how the retailer’s products might look in their homes. The CEO and other C-suite executives reinforced the importance of “transformation through innovation” in town hall meetings with employees, during earnings calls, in public interviews, and in press releases. The leaders’ words and investments sent a clear message to customers, employees, and other stakeholders about the importance of innovation in the retailer’s ability to transform and grow. And the efforts paid off: over time, as the new features were launched, the company’s online sales grew 80 percent, with digital sales accounting for 60 percent of overall revenue.
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Innovative growers are delivering profitable growth relative to their industry while also excelling in the essential capabilities associated with innovation. Our research reveals the degree to which their focus on both is helping these organizations create lasting value. It also suggests that other companies, too, can join this small but diverse set of outperformers by putting innovation at the center of all decision making and supporting it with the right mindsets, pursuing multiple pathways to growth and innovation, and establishing the right capabilities across R&D, digital, analytics, and M&A.
The path may be steep, and the transformation will likely take time and dedicated management attention, but the companies that seek to emulate the innovative growers may eventually achieve a profitable balance between today’s growth objectives and tomorrow’s innovation potential.
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Here is a direct link to the complete article.
Matt Banholzer is a partner in McKinsey’s Chicago office, Rebecca Doherty is a partner in the Bay Area office, Alex Morris is a partner in the Toronto office, and Scott Schwaitzberg is an associate partner in the New York office.
The authors wish to thank Guillermo Domínguez, Gopal Galgali, Brooke Harvey, Tim Koller, Laura LaBerge, Karin Löffler, Karthik Ramesh, Werner Rehm, Tido Röder, Erik Roth, Eshita Sangal, and Jill Zucker for their contributions to this article.