Innovation has long been a priority for many CEOs. Now, the pandemic has added new urgency to the quest: COVID-19 has driven a jump of 10 percentage points (to 75%) in the share of companies reporting innovation as a top-three priority—the largest year-over-year increase in the 15 years of BCG’s Most Innovative Companies survey. The data also shows that C-suite-level engagement matters: among companies that outperform their peers on innovation outcomes (as measured by their share of sales from new products and services), close to 90% demonstrate clear C-suite-level ownership, compared with only 20% of underperformers.
As part of our research for this year’s report, we spoke with CEOs and other innovation leaders in a wide range of industries—including consumer goods, energy, materials and mining, industrial goods/manufacturing, pharmaceuticals, software and services, technology hardware and equipment, and telecommunications services—about their innovation efforts. A few clear themes emerged:
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Although the particular emphasis varies by industry and by individual company readiness, we found five recurring topics that CEOs wrestle with as they work to embed innovation in their companies’ DNA and to scale up this critical capability:
These questions mirror the top five priorities we found in our latest survey. Here we examine each one.
COVID-19 provided an unexpected stress test for many companies’ business models, and it did so on the back of already mounting pressure from competitive disruption. One result is that almost half of all companies (49%) see business model innovation as a top-three priority going forward, with particular urgency felt in the energy sector (toward decentralization and green), the software sector (toward cloud and software as a service) and the insurance sector (toward digital and analytics first). Since business model innovation, by definition, simultaneously changes a company’s value proposition and its operating model, the C-suite needs to own the endeavor. Neglecting it is a good way to jeopardize the future of the company.
Business model innovation can take many forms. Leading firms are making both gradual and more abrupt moves inside and outside their core business, depending on the level of disruption in their industry and the availability of adjacent growth opportunities.
Most companies are at least gradually or partially altering their core business models. Digital opportunities and the sustainability imperative are two key forces driving this change. For example, we worked with a global automotive OEM to open up the software in its vehicles to outside developers, much as Apple and Google do with their smartphone operating systems, by building an application programming interface (API)—with appropriate safeguards—to enable third-party developers to build apps and solutions on top of it. The company not only expects this API to generate incremental revenue, but also hopes to see a business ecosystem take shape that will provide a differentiating consumer experience.
In addition, more companies today are building adjacent and new-frontier business models to serve as growth engines. Bridgestone, for instance, acquired TomTom Telematics so it could offer new integrated business models such as tires as a service and predictive fleet maintenance. In many cases, M&A may be necessary to add or scale up such capabilities quickly.
Relatively few companies are undertaking a full reinvention of their current core business model. Netflix’s transition from renting DVDs to operating the world’s largest streaming video subscription service and Microsoft’s shift from selling software to positioning itself as a cloud-based provider of software as a service are two well-known examples that showcase both the extent of disruption to their previous business models and the rewards of success.
BCG research indicates that some 80% of consumer-facing companies use only the most basic customer insight tools. Although many companies invest significantly in conducting consumer research or tracking consumers’ behavior over time, they may lack the capacity to move from data to insights and then to action.
Leading companies use novel customer insight and market segmentation approaches such as demand-centric growth (DCG) to understand emerging or untapped customer needs, identify and size growth and expansion opportunities, and prioritize innovations that have the highest ROI. One critical feature of these approaches is that they help companies better understand not only what, when, and where customers want to buy, but also why they want to buy—information that is critical to identifying key opportunities and potential hurdles in the innovation process.
Before the pandemic, Hilton used a combination of DCG and customer insights to reorient its brand portfolio, leading to significant growth and contributing to a gain of almost $14 billion when the company’s sale was completed in 2018 (one of the most profitable private equity deals ever). After analyzing the evolving hotel landscape and shifts in customer preferences (including the influence of new competitors such as Airbnb), Hilton identified the untapped opportunities in its portfolio and launched Tru by Hilton, a new brand. Tru by Hilton addressed an underserved customer need to “get in and get out,” combining lower operating costs (free coffee but no free breakfast) and lower capital costs (no front desk or pool, and rooms with smaller bathrooms).
To trigger these kinds of successes, the customer insight function must have effective tools, but it also requires elevation to the status of a true strategic insight partner on innovation. Too often today, the primary role that customer insight plays is that of input provider. One reason for this situation may be that, according to BCG research, two-thirds of all organizations have not perceived their CEO as truly championing customer insight—often to the surprise of the CEO.
Converting insights into winning formulas isn’t the result of one-off efforts but rather of a systematic approach to experimentation and innovation. The most successful CEOs embed insight-based innovation in their company’s culture, in its ways of working, in its organizational design, and in its leadership model. By doing so, they push innovation to frontline teams across their business and empower those teams to identify and remove sources of friction for customers. They make everyday innovation a source of competitive advantage.
At the heart of this approach is a concept we call the innovation flywheel—the insight-based learning loop that powers everyday innovation. (See the exhibit.) It takes as its premise the idea that the more you know about your customers, the more opportunity you have to innovate on their behalf. Every interaction with an end user (customer or employee) produces information and data—both qualitative and quantitative—that generates insights into where and how new value can be created. This in turn drives the next round of innovation, which achieves deeper engagement with the end user. This process creates a virtuous cycle that, once in motion, generates greater engagement and new insights.
Companies have to exert substantial energy to get the flywheel spinning because at the outset they must overcome structural barriers such as organizational and incentive misalignment, sluggish decision making, and brittle legacy systems. The effort entails challenging existing paradigms, breaking organizational silos, and enabling true collaboration on shared goals by cross-functional teams—all of which require sustained leadership from the CEO. Once the process takes hold, however, it generates enormous energy and creates a self-reinforcing loop that attracts new talent, promotes a maker culture, and drives change from the inside out. Our recent article provides an insider’s view of the innovation flywheel in action and examines the dramatic impact it is having at companies in multiple industries.
The year 2020 put to rest any remaining doubts about the value of digital processes and value propositions. Digital transformation of the core business is now a top priority for 75% of CEOs, and 65% of firms are doubling down on their plans for transformation with renewed urgency. One big benefit of digital is its ability to turbocharge innovation and create competitive advantage through new products, services, and business models.
Companies face a major challenge in this regard, however: our research shows that most digital transformations fail to deliver the desired results. BCG recently identified six success factors that together—and only together—flip the odds of digital transformation success from 30% to 80%. Those six success factors are close integration of digital strategy with the business strategy, commitment from the CEO through middle management, a talent core of digital superstars, business-led and flexible technology and data platforms, agile governance, and effective monitoring of progress toward defined outcomes. Bringing together all six factors is essential to becoming an innovative organization in the digital age. (You can take a quick online self-assessment of your organization’s likelihood of success in digital transformation here.)
Organizations don’t change overnight. Transforming leadership, culture, talent, governance, and technology takes time. One approach to assembling the key success factors described above is to embed a microcosm of the desired future-state organization into teams that are driving frontline change. As the number of such teams increases across the company, change occurs iteratively and continuously. We describe this as taking an MVP/MVO (minimum viable product/minimum viable organization) approach. Every innovative MVP that the company produces creates a surrounding MVO. In practical terms, this means putting just enough of the right components—leadership behavior, culture, talent, new ways of working, governance, processes, and tech—in place to enable the MVP to thrive.
Successful companies follow this organic approach to transformation by starting small (but thinking big), learning by building, and setting the first flywheel in motion by surrounding it with the MVO it needs to sustainably succeed. Just as an MVP is a test-and-learn proof point for a new offering, an MVO serves as a proof point for the power of a more digital-, agile-, and innovation-first organization—what we call the Bionic Company. As MVPs proliferate, so do MVOs, until the organization reaches the necessary tipping point to rewire itself and ensure that the change sticks.
National Grid, a leading utility, scaled up the flywheel and implemented the MVO change model by identifying value pools along its value chain and then launching innovation sprints to target each opportunity area with digital solutions and products. The utility has now launched its first wave of digital solutions. One is a field-force enablement platform that radically streamlines network repair and maintenance operations by putting the line worker, supervisor, and clerk at the center of the flywheel innovation cycle. Teams are rapidly adopting this approach across field service operations, and early results show that doing so reduces the average closure window for a field repair job from 77 days to 48 hours. National Grid now has more than eight flywheel teams in flight, exposing more than 200 employees to the flywheel approach. The utility’s goal is to have more than 25 fully operational flywheel teams in place by the end of 2021.
BCG research has found that 65% of companies today work with startups or new ventures. For this purpose, they have set up innovation vehicles of one or more types—such as corporate venture capital (CVC) funds, accelerators, incubators, or open innovation units. But 45% of such companies have expressed dissatisfaction with the results of their efforts, because the programs have not delivered meaningful impact for them.
In our experience, three factors are key to unlocking significant impact from corporate venturing. The first is to define a clear mandate for the corporate venturing program and the required innovation vehicles. Relevant criteria include the anticipated contribution to the parent’s growth ambition, the role of the program within the overall innovation agenda, and the ways in which the chosen vehicles complement R&D and M&A in the strategic objective—such as in building a new vertical or gaining access to new technologies. The second factor is to rigorously determine a budget allocation for each vehicle as part of the overall R&D budget allocation—even in difficult times—to avoid hobbling efforts to get innovations off the ground. The third is to ensure establishment of a link to the strategic competitive advantage of the parent company, such as its capabilities, market access, and existing customer base. This requires setting the right governance and incentives as well as ensuring buy-in from senior business leaders.
We worked recently with a leading consumer appliance manufacturer that historically had focused on its core business and powerful technology and R&D capabilities. The board wanted to significantly increase revenues outside the core. To leverage its technology and R&D capabilities, it established a dedicated business-building unit with a clear mandate to create or buy scalable businesses in adjacencies. In line with the factors described above, this approach had three critical components. The first was end-to-end responsibility to grow the businesses by applying strategic partnering, M&A, incubation, minority investments, and co-creation. The second was appropriate ring-fenced funding to achieve the growth ambition. The third was access to the core business’s technology, R&D, marketing, and sales capabilities. The guiding principle was to systematically leverage the firm’s strategic advantages and to de-risk and scale the new businesses.
Innovation creates long-term value and builds resilience in the face of crisis. But it requires active leadership from the top. Our research shows that executive teams at innovation leaders engage in this process far beyond merely setting the agenda and holding people accountable. They also elevate customer insight, actively manage the portfolio, and personally engage with innovation teams. Satya Nadella, Microsoft’s CEO, has stated, “The purpose of our leadership team is to bring clarity, alignment, and intensity.” Any company whose leadership team brings these attributes to its innovation program will likely reap substantial rewards.
This article is the second chapter in BCG’s Most Innovative Companies report for 2021, Overcoming the Innovation Readiness Gap. Continue reading the final chapter, “How Leaders Bring Product and Sales Teams Together.”