Senior Partner & Managing Director
With all the buzz about disruption these days, it’s a bit surprising that only 13 percent of respondents reported that their companies have a significant ambition to deliver radical innovation. More perplexing is that 42 percent of these would-be disruptors indicated that their companies’ innovation capabilities are average at best. Many companies seem more set to break down than break through.
Innovation is hard. Breakthrough innovation is even harder. In our experience, only companies with a foundation of already-strong innovation capabilities can aspire to break through. Too many companies want to shoot for the moon while their innovation programs are barely airborne.
The idea that big companies can replicate the approach of a garage startup is a continuing corporate myth. At big companies, innovation requires commitment, discipline, strong processes, and a willingness to take risks and fail—those latter attributes, especially, are not ones that most corporate cultures embrace. Executives from companies with strong innovation capabilities —and disruptive ambitions—represent just 7.6 percent of our sample. (See Exhibit 1.) Studying how the practices of these breakthrough innovators differ from those of strong innovators that have no radical intent reveals five key distinctions—two that are matters of degree and three that are matters of difference.
In the 2013 report, we identified five characteristics that differentiate strong innovators and made the point that these are not individual drivers of success; these factors are interconnected and reciprocally reinforcing.
These attributes are table stakes for breakthrough innovators, which perform just as well as, and often exceed, strong innovators on each one. For example, top management is committed to the efforts of both breakthrough and strong innovators, but respondents from breakthrough innovators reported a higher level of executive commitment to radical innovation (84 percent) than did those from strong innovators without the ambition to disrupt (71 percent). Their innovation programs are more customer focused, and they more often use customer ideas as sources of new ideas. Breakthrough innovators excel at portfolio management, especially at stopping projects they do not believe will pan out, and at managing products once they are in market. They have highly disciplined processes that focus on progress reviews, clear decisions, and on-time completion.
And breakthrough companies exceed strong innovators in their pursuit of IP-based advantage. They are more likely to use IP to exclude others or gain competitive advantage—and to use IP as a lens for portfolio management. But breakthrough innovators don’t just leverage IP more aggressively: they do so more subtly. Tesla Motors, for example, recently announced it will not sue other electric-car makers that use its technologies “in good faith.” Tesla realizes that while it has a formidable patent portfolio, it can’t build the electric-car industry on its own. Moreover, it understands that its patents could discourage others from entering the market. The company is betting that by removing the threat that it will protect its patents, it will accelerate the growth of the market and the infrastructure of charging stations needed to support it. (See “Tesla’s Gambit: Aligning IP Strategy with Business Strategy,” BCG article, August 2014.)
At the highest level, breakthrough innovators put a higher priority on innovation—far more so than other companies do; they know innovation is essential to their future. The top corporate priority at more than half of breakthrough companies (54 percent) is innovation and product development, and it’s a top-three priority at 92 percent of them. But breakthrough innovators differ from the rest in three other specific ways.
The proof of these differences can be seen in the results: almost half of breakthrough innovators report generating more than 30 percent of sales from innovations from the prior three years—more than twice the average for all companies.
Perhaps no company exemplifies the ethos of breakthrough innovation better than Amazon. And no company has been more effective at building on what it has learned at each stage of its disruptive development.
Amazon got its start upending the book-publishing business with an online sales model. Then it upended that business again with the e-book. The company has used the lessons learned to expand into myriad other areas of retailing, significantly transforming the consumer purchase pathway and rearranging consumer expectations of what the shopping experience should be. It had embraced thousands of customers as product reviewers and engaged thousands of traditional retailers with the development of Amazon Marketplace. Although it is far from the biggest retailer (Wal-Mart’s annual sales of $475 billion dwarf Amazon’s $75 billion), it is the one retailer that all others in the retail and consumer-packaged-goods sectors must take into account when planning their future strategy. (See “Secrets of Online Marketplaces,” BCG article, December 2012.)
Amazon rolls out new products and services with almost frightening speed: the Kindle e-reader, Kindle Fire tablet, the Amazon Fire Phone, Amazon Prime, AmazonFresh, and Subscribe & Save have all been introduced in the past ten years. Amazon Web Services has led the paradigm shift to cloud computing and is a major force in enabling big-data analytics. The company has built one of the biggest and most valuable databases of consumer information based on its 150 million customer accounts. Nobody laughed when Amazon debuted the idea of delivery by drone on CBS’s 60 Minutes.
Several characteristics define Amazon’s disruptive approach throughout its relatively short 30-year history: a long-term horizon, a searing focus on the customer, and a relentless ability to learn from one disruptive move the lessons that could be the basis for the next.
To be sure, not every company wants or needs to break through to the same degree. Perhaps it is not surprising that companies with long innovation cycles, such as industrial-goods and pharmaceutical companies, have less aspiration to be disruptive. And although one could argue that these executives may be underestimating the risks they face, there is a more important issue to address: many more companies out there aspire to break through than have the capabilities to do so. Most will not succeed. But they can improve, and there’s nothing stopping those that truly want to apply themselves—aside from their own institutional constraints—from joining the breakthrough elite. They need to prepare themselves for an arduous process, however. Putting the building blocks in place is an essential first step.