Managing Director & Partner
Innovation is a leading priority for CEOs: more than 70% list it as one of their top three areas of focus. Yet only 16% of companies we’ve surveyed believe that they’re better innovators than their peers.
What’s holding them back? In our experience, innovators typically fall short for one of two reasons. Either they pursue the wrong innovation model for their business and competitive context, or they don’t support a good model with the capabilities it requires.
BCG recently studied more than 100 of the world’s most innovative companies—industry leaders in TSR and fixtures in BCG’s annual innovation report. (See, for example, The Most Innovative Companies 2016: Getting Past “Not Invented Here,” BCG report, January 2017.) Our goal was to determine which types of innovation models the leaders use, which models are most successful in which industries, and which underlying capabilities are necessary to deliver on each model.
Let’s take a quick look at these models and the types of companies that embody them:
Choosing the right innovation model for your company is all about context. Industry context matters because only a subset of models can succeed in most industries. Some models are better suited to—and increase shareholder value in—certain industries and sectors than others. For example, four models drive TSR premiums in consumer retail:
Companies struggle when they pursue an innovation model that their industry doesn’t reward. For instance, retailer Sears (–23.6% TSR) used the defender model, counting on its brand recognition and network of brick-and-mortar stores to stay ahead. But when agile online players upended the retail industry, Sears lost its edge.
A company’s individual context is also critical when choosing the best innovation model: How important is innovation to the company’s strategy, its competitive position in the larger market, and the capabilities and advantages that set it apart? As the examples above show, companies in the same industry can succeed with different models—but the chosen model must align with a company’s strategy, strengths, and capabilities. For example, Amazon and Costco both have advantaged—but different—business models. The expander model is a better choice for Amazon because it reaches a much broader pool of consumers and drives more rapid top-line growth, both of which align closely with the company’s strategy and ambition.
Answering a set of common questions can reveal your company’s context. Is innovation seen as a growth engine or a defensive tool in your overall corporate strategy? How strong is your company’s competitive position, and how durable is the source of your competitive advantage? How important is brand, and what is the relative strength of your brand equity? How robust are your innovation-related capabilities compared with others in your industry? How much are you willing and able to invest in innovation? And, most important, how quickly does your sector change—and what value can be gained if your organization stays ahead of the curve?
When choosing a model, look for one that competitors either aren’t using at all or are using poorly. Consider the investment required in terms of dollars, time, and the cost of upgraded capabilities, and then filter the options through the lens of your ambition and resources.
Migrating to a new model or better aligning your capabilities with an existing one are the most challenging aspects of transforming a company’s innovation capability. The six innovation models are not abstract ideas. Each has a set of design principles and characteristics that govern the whole.
It helps to have an innovation blueprint clearly laying out all the interconnecting pieces that must align with and support the model. These include the company’s organizational structure and culture; tools and processes for idea generation, commercialization, and portfolio management; and metrics and incentives to drive, track, and measure results. Such a blueprint can help companies commit to and reinforce their models through the design decisions that flow through their organizations. Consider the following:
In our experience, the six innovation models offer a powerful way for organizations to evaluate and refine their innovation strategies. They also help executive teams grapple with critical questions, such as, Which model are we pursuing and why? Are our processes and organization aligned with that model? Does the model confer advantage in our industry? Which models are rivals pursuing—and how well are they doing? Should we reconsider our innovation strategy and model? What investments and capabilities would a shift in those areas require?
Working through these questions will help companies choose the right model, develop the supporting engine to drive it forward, and reap the growth dividends that accrue from innovation success.