What Sets the Most Effective Innovators Apart

Incumbents and start-ups around the world collectively spend hundreds of millions of dollars per year on innovation-related activities. Yet according to our analysis of 170 of the largest global companies by revenue, the return on innovation spending has significantly declined.

We believe a reason is many companies, under pressure to show that they can disrupt a market (or to stave off disruption), are pursuing innovation haphazardly. Much of the investment ends up being non-strategic, poorly linked to the business, and undermanaged. Some have even argued that innovation spending and activities are often exercises in corporate image-building rather than attempts to increase productivity or performance. No wonder companies are disappointed by their results.

In a study of C-level executives at 840 companies from eight countries and 14 industries with revenues over $500 million, we identified a small number that appear to be bucking the trend. Their secret: They strive to innovate in ways that would have a major impact on markets and society, and they revamped how their organizations pursued innovation and brought their capabilities together in a single “architecture.”

While gauging innovation success is always a challenge, we focused on three key questions to identify these companies: Which were ramping up innovation investment? Were executives satisfied with the business results of those investments? And were those companies growing at a strong clip?

Only 31 of those companies that had increased their spending on innovation by more than 50% between 2012 and 2017 also self-reported being “very satisfied” with the business benefits resulting from their innovation initiatives. Their market capitalization grew at a 6% compound annual rate between 2012 and 2017 (in other words, more than double the growth rate of global GDP for that period).

What did they do differently? Here’s what we learned:

**Aim high. **The effective innovators focused on solving big problems. They saw innovation as a means to an end, not the end goal. In contrast, less effective innovators focused their innovation investments on incremental improvements to existing products and services.

Two practices stood out. By a margin of 16 percentage points relative to the other companies sampled, the effective innovators put greater emphasis on developing unique technological advances with the potential to create entirely new markets. They also deliberately target consumers’ “higher needs” — such as autonomy, happiness, and social connections — at a higher rate (a gap of 22 percentage points relative to the other companies sampled).

In India, for example, Reliance Industries invested $32 billion to create Jio, a mobile-phone network launched in 2016 with the goal of reaching lower-income consumers who were on the have-not side of the digital divide. Technology-enabled innovations were core to making its ambition of “democratiz[ing] the digital culture in India” a reality.

Jio’s was the first mobile network in the world to run entirely on 4G LTE technology. And to reach lower-income Indians who have been put off by the cost of 4G-compatible phones, Jio also developed a low-cost phone. The JioPhone, a basic 4G-compatible handset, was first rolled out in rural areas and was offered for a refundable deposit of Rs1,500 ($23) which can be reclaimed by returning the phone after three years of use. It is estimated that Jio’s subscriber base has exceeded 250 million, which has enabled the company to command a 21% share of the overall handset market and 38% of the feature phone segment in 2018.

Jio plans to repeat the achievement with Jio GigaFiber, a fiber fixed-line broadband service that is expected to be available in 1,100 Indian cities in 2019, in what would be the largest greenfield fixed-line broadband rollout in the world.

Jio is not only transforming the Indian telecoms market. It is also galvanizing India’s digital economy, enabling e-commerce sites such as Flipkart and BigBasket to attract customers beyond the urban elite and providing a platform for a range of services from live TV to music, messaging, and online payments. Reliance Industry’s vision of turning broadband and digital services into “basic necessities” that are widely accessible to consumers requires substantial appetite to invest in infrastructure (such as telecom towers and fiber assets). While few companies would have the resources to make and sustain investments on this level, the central point holds: Those that figure out how to scale technology-enabled innovations will be rewarded.

Apply a single organizational architecture. The effective innovators had developed comprehensive approaches to pursuing innovation. They had integrated their capabilities together in a single architecture. In contrast, more than half of the executives in our study said that innovation was “an ad-hoc creative process” — in other words, moments of inspiration produced by isolated teams located a safe distance from the core business.

By encouraging everyone in the organization — across their legacy businesses and their new ventures — to draw on the capabilities of the centralized innovation architecture, effective innovators got the most from their innovation efforts. To a much greater degree (23 percentage points more than the other companies sampled) effective innovators placed their trust in small, cross-disciplinary teams; they also invested more to develop the capabilities of senior leaders tasked with overseeing innovation-led change and to build the skills of the entire workforce to keep up with the pace of technological change.

Consider the Bosch Group, the 132-year-old German industrial giant that has made the internet of things (IoT) a primary focus. Its CEO, Volkmar Denner, invited the entire workforce to form “disruption discovery teams” to develop ideas for new business models that attacked Bosch’s existing business model — and received 1,800 ideas in six days.

These teams have now been institutionalized. Once an idea is selected, team members are brought together from different continents, functional areas, and hierarchical levels and are released from their regular roles for eight weeks.

One IoT-focused solution to emerge from the teams was “community-based parking,” which uses a car’s sensors to detect empty parking spaces. The information collected from the network of cars is uploaded to the cloud, creating an up-to-date map of all free parking spaces in a city. Displayed spaces match vehicle requirements — such as size and the need for battery charging — enabling users to identify a space for their specific needs.

Innovation will always be a challenge, and we don’t claim to have the foolproof recipe. Companies can both aim high and develop comprehensive, integrated capabilities and yet still fail in other areas basic execution, misreading of the market, regulatory snafus, and more. But using innovation to persistently push the boundaries on big issues facing consumers and society mixed with stimulating the change deep down in your own organization is a winning place to start.

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