Related Expertise: Innovation Strategy and Delivery, Business Model Innovation, Product Innovation and Engineering
Some of the biggest breakout successes in business history have been the product of iconic founding teams that combined technological foresight and customer insight. Think Steve, Woz, and Apple.
These symbiotic relationships do not always scale well, however. As companies grow and mature, even highly successful startups tend to organize themselves by function, and the functions morph into silos. The crucial link between technology and product on one side and customer and market insight on the other can break down. Our research, supported by our case experience, suggests that the disconnect between product-facing teams (often in R&D or product development) and customer-facing teams (often in business development, marketing, or sales) is the number one obstacle to innovation success.
Not all firms struggle. Leading innovators build success upon success with a seemingly infallible ability to think about product and customer together. Amazon, with its customer-obsessed, day-one mentality, is a good example. For this year’s report, though, we ventured beyond lessons from digital-native innovators to ask: What can we learn from companies that are not yet in the spotlight but nevertheless lead innovation in their respective industries? Are they pioneering new management practices or simply putting well-established methods to new use in innovation?
We interviewed executives at ten industry-leading innovators that have found ways to overcome barriers between their product- and customer-facing teams. We offered to exchange anonymity for candor, and here we report on the practices they apply to maintain and sometimes reinvent this relationship.
The Most Innovative Companies
Overcoming the Innovation Readiness GapExplore the 2021 Report
In our 2021 research, almost a third of companies cited less than optimal collaboration between their R&D and sales teams as their biggest obstacle to higher innovation output. The results were remarkably consistent across industries. (See Exhibit 1.)
These results certainly resonate with our experience. We often hear product development staff grumble that marketing and sales teams are not pushing their new inventions—and salespeople complain that new technologies alone do not make exciting value propositions for their customers. (See Exhibit 2.)
This dynamic leads to another disconnect. Even as more CEOs push for a shift from traditional incremental product innovation toward disruptive digital service and business model innovation, the pressure from the front lines—on both the product development and commercial sides—pushes in the opposite direction: toward a default position of safer, more cautious step-by-step product innovation. Not only are the scientists/engineers and the salespeople not talking to each other, they are inadvertently preserving the status quo.
Companies across the board are coming to grips with this challenge. In 2020, 30% of the companies in our survey reported that they were focusing on this issue as their top innovation priority, and another 27% plan to make it their top priority in 2021.
Leading companies already deploy an array of solutions to bridge the divide between product development and sales and to build momentum for more disruptive innovation. These efforts range from the strategic (such as using M&A to fill capability gaps) to the day-to-day (requiring greater co-location of people from different functions).
We recently studied ten great performers in multiple industries to determine how they address this divide. The companies we analyzed include members of BCG’s 50 Most Innovative Companies and other standouts in individual industries.
We discovered that leaders that build the requisite links between their technology and product development teams and their customer-facing teams excel at three increasingly important types of innovation. Heading the list is disruptive product innovation—being first to find valuable use cases for a new technology. Second comes digital service innovation—adding digital service or subscription revenue to existing high-performing product- or hardware-driven business models. Third is business model innovation—radically innovating the core value streams of a business to deliver value to new customer groups or find new ways to monetize or deliver products or services.
Four types of solutions, implemented singly or with others, have shown significant success:
Here are some examples of what leading innovators in their respective industries are doing in each of these areas.
Build a One-Team Mentality
Cross-functional teams are a hallmark of many innovation leaders. Take for example an innovation leader in insurance. This European property, life, and health insurance company links strategy, product development, and sales by building small global end-to-end teams to develop adjacent growth opportunities. The teams are centrally coordinated but sit within the business, and their members possess a minimum viable set of cross-functional abilities, including commercial, sales, and operations skills. Teams access specialized actuarial or underwriting expertise, as needed, project by project. This approach has enabled the company to become a leader in new insurance solutions in emerging and high-potential market segments such as autonomous vehicles and shared mobility.
To better link the work that its digital accelerator produces to its core business, one of Europe’s most innovative media publishers encourages flexible talent rotation across business units. Idea originators can switch temporarily out of their line responsibilities and become project managers for the development of their ideas. Employees can choose to spend three months in the company’s innovation lab to validate an idea and build a minimum viable product. A senior business leader from a relevant business unit guides their work, championing the project and ensuring that emerging products find a home in the organization. Such rotations have become a coveted opportunity for young talent to demonstrate their leadership abilities, and the publishing house has successfully established a one-team mentality across its organization of disparate publications. It has also spun out new fully digital businesses with a multimillion-euro valuation.
Or take the case of a leading serial innovator, a global hardware and software company. For years, the firm struggled to translate deep research insights into customer products. It then adopted two critical changes: shifting its central R&D budgets into the businesses and, even more fundamentally, revamping its engineering team culture. The organization now emphasizes “three moments of truth.” In accordance with these critical parts of the process, engineers not only work in product development but also participate in the sales launch (“ship it!”) to see and learn from deployment hiccups that inevitably occur. They become their own customers, actively using their products in daily life (“use it!”). And they regularly switch job roles between R&D and business teams (“rotate it!”).
Align Incentives with Matching Metrics
Although everyone knows that incentives are fundamental to driving desired behavior, it’s hard to find companies that consistently incentivize innovation. A multinational industrial goods company and serial innovator across industries uses what we call matching metrics to address both sides of the innovation equation: R&D and business teams. Business unit leaders are incentivized on product vitality (the share of sales from products launched in the past three years) while R&D leaders and engineers are incentivized on new sales generated by the patented products or technologies they develop. Both functions collaborate more effectively because the company uses complementary metrics to steer them. Introducing such shared metrics is relatively straightforward, but it requires a robust accounting system to track innovation activities and outcomes. A unit of this sort requires significant resources, but in our experience the induced culture change clearly outweighs the costs.
To complement its use of hard metrics, an industry-leading global IT hardware and software company relies on soft incentives to drive cross-functional alignment. Market-facing business units receive half of the overall corporate R&D budget and have a mandate to define near-term product development priorities. The company also temporarily assigns agents from the central R&D function to business units to help build personal networks. In addition, the company spends considerable resources on three distinct exchange formats. Science fairs—involving 30 to 150 people each—showcase early-stage technologies within the R&D community and speed progress on prototypes. Affinity groups, which often meet virtually, explore broader application areas such as natural-language processing. Yearly meetings that mix the R&D and business development teams showcase later-stage technologies or early product ideas and achieve buy-in from the business. The company has successfully launched a steady stream of valuable product, service, and business model innovations and is widely recognized as a serial innovator.
Establish Clear Lines of Communication, Mandates, and Accountability
Clear accountability and communication are essential ingredients of effective innovation systems. An industry-leading global retailer takes this basic insight to a near-flawless level of execution through a system of mirrored central and regional teams that matches team member roles one-to-one. This ensures direct exchange and accountability as well as clear channels for feedback to the central team on local customer needs. To avoid local bottlenecks, the company tracks product managers’ performance centrally, starting from product development and continuing through rollout. To address a common obstacle to effective scaling, it established a central launch support team to share insights and discoveries from multiple regions and to make experienced backup resources available as needed.
A leading cybersecurity and privacy company manages its middle- to long-term innovation output via a shared roadmap that R&D and product owners in the core business units jointly maintain. This proves especially valuable for integrated services that leverage hardware and software solutions and are sold directly to end customers via subscription models, since these types of innovation activities require a shared understanding of long-term customer needs and do not rely on precise technical requirements from channel partners or B2B intermediaries.
In a similar vein, a leading medical technology company recognized the need to bring its R&D and sales teams closer together. For this firm, the solution started at the top, by elevating the head of R&D to board level as CTO and then bringing together the CTO, the chief sales officer, and the head of innovation in an innovation council to manage the portfolio and project pipeline. To further support the equal partnership between commercial and R&D teams, the R&D function retains end-to-end technical accountability for the product for up to a year after launch.
Shift the Status Quo and Celebrate Success
Companies are finding lots of ways to shake things up and look at opportunities through new sets of eyes. For example, a top electronics and telecommunications company leverages the full potential of a technology along the product life cycle by keeping the patent-holding R&D engineers involved, as part of a technical steering body. Besides facilitating the exchange of knowledge, this setup recognizes and celebrates the business contributions of engineers who develop boundary-breaking ideas that shift the status quo.
Finally, consider the case of a leading multinational medtech company that, after years of incremental product progress, realized the value of thinking in terms of customer value propositions rather than technical requirements. Its business teams, which used to spec products to be built, now frame problems from the end user’s perspective for new product development. In this way, business teams empower R&D teams to craft more novel solutions to meet customer needs. This shift is often initially challenging for everyone involved, but once the new language is embedded across the organization, it creates the space necessary for more disruptive product and business model innovation.
The year 2020 was one in which many firms improved their cross-functional team efforts, often in remote work settings. But advances born out of necessity now must be made to stick. Companies can nurture and extend successful innovations in many ways. Executives have a varied toolkit at their disposal, starting with tried-and-true organizational or governance measures and extending into initiatives such as incentive design, systematic relationship building, and culture change. Although appropriate solutions for specific cases depend on starting point and industry, the examples drawn from the non-digital-native firms described above demonstrate that there are many paths forward.
This article is the third chapter in BCG’s Most Innovative Companies report for 2021, Overcoming the Innovation Readiness Gap. Explore the rankings over time, from 2005 through today.