Innovation Blog

30.10.07

How companies approach innovation: A McKinsey Global Survey



How companies approach innovation: A McKinsey Global Survey

Executives say innovation is very important, but their companies' approach to it is often informal, and leaders lack confidence in their innovation decisions. Top managers and other professionals agree that the biggest challenge is talent but disagree on why. Nonetheless, executives agree on some steps to improve innovation.

October 2007

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Executives now firmly believe that innovation is central to a company's strategy and performance, but getting it right is as hard as ever, according to a recent McKinsey Global Survey.1 Some 70 percent of corporate leaders say innovation is among their top three priorities for driving growth.

But the way companies manage and govern innovation doesn't reflect that importance. For instance, although executives say corporate performance is most likely to be affected by breakthrough innovations, they also say their companies generally focus on innovation in areas such as product or service development. Only 36 percent of top managers—and just over a quarter of other executives—say innovation is part of everything the organization does. Further, although more than a third of top managers (those at the senior vice president level and above) say innovation is part of the leadership team's agenda, an equal number say their companies govern innovation in an ad hoc way.

Top managers and other executives agree that the most important drivers of innovation are culture and people—and that companies face significant challenges with both—yet the two groups have different views of those challenges. Areas of disagreement include whether the company has the right people to innovate and particularly whether top managers adequately protect these people. Similarly, 38 percent of top managers say their organizations encourage learning from innovations that fail, a view shared by less than a quarter of other executives.

Both groups agree on a few organizational and cultural steps that would improve the innovation performance of their companies. The most widely shared idea is making innovation a core part of the leadership's agenda, followed by modeling the right behavior and improving processes for managing innovation risk.

Notes

1 The McKinsey Quarterly conducted the survey in September 2007 and received responses from 722 executives at the level of senior vice president and above and 736 lower-level executives from around the world and representing a broad range of industries. The data are weighted to reflect a proportional representation of segments in the total population.



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Important but not governed

Executives certainly see innovation as an important driver of growth, with some 70 percent of top managers saying it is one of their highest priorities. In addition, more than three-quarters of survey respondents say the huge amount of media attention to innovation has, at the least, raised their companies' awareness of the importance of innovation. Nineteen percent say the attention has caused them to make innovation the main focus.

That importance is borne out in some of the decisions made by top managers. A majority, for instance, say they routinely decide where to focus innovation efforts, where and how to commercialize, or who works on innovation (Exhibit 1). But top managers don't seem to think they have a lot of control over the innovation process as a whole. For instance, less than a quarter of respondents indicate that innovation budgets or targets are decided at the top. Further, many top managers lack a structured approach to making innovation decisions: though 40 percent say they rely on a solid fact base, almost as many, 37 percent, say they depend on a consensus of their peers; only 21 percent rely on intuition.

In addition, companies often seem to isolate innovation projects within business units, even when they see bigger opportunities. When asked where change would produce the greatest improvement in performance, for example, top managers rank product and service innovations much lower than breakthrough ideas. Yet a majority also say innovation at their organizations is primarily focused on developing products or services and that dedicated teams within business units are the most common way they develop and commercialize new ideas (Exhibit 2). Less than half of top managers say they frequently define themes for breakthrough innovations.

Similarly, top managers indicate that they are isolated from the innovators within their companies. Most often, top managers get their new ideas from informal, external sources (such as discussions with peers and interactions with consumers), not from the business units or formal teams where innovation tends to occur (Exhibit 3).

Finally, most organizations seem to lack consistent central governance that could track the work of the business units on innovation. Only 34 percent of top managers, for example, say innovation is part of their leadership team's regular agenda—and only 22 percent of other executives perceive that to be so (Exhibit 4). Further, only 27 percent of top managers say that their processes for budgeting, strategy, and growth, including innovation, are fully integrated into their annual planning process, although nearly half say there are informal links.




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Too little talent or too many barriers?

It is often said that a company's main challenge with innovation is finding enough talented people. In this survey, top managers agree that identifying the right people and aligning them for innovation is their single-greatest struggle and that the most important drivers of innovation are the organization's culture and people. The survey also suggests, however, that companies discourage talented staff from pursuing innovation by offering limited incentives, being risk averse, and having no plan for dealing with failure. And the survey shows that top managers and other executives have different perceptions of the struggles related to finding and aligning their people.

Some 40 percent of top managers say that they do not have enough of the right kind of employees. Among top managers who do say enough people are available, however, nearly half say the right employees are in place, motivated, and protected by senior leadership, and only 22 percent say the organization's culture inhibits them from making progress (Exhibit 5).

Other executives take a different view. Only 31 percent say the problem is that they don't have enough of the right kind of people. Among those who say the organization does have the right employees, almost one-third say the company's culture inhibits progress. Only a third say innovators are protected by senior leaders.

There are also disparities in executives' perceptions of how their companies react to failure in innovation. Far more top managers say they actively encourage the organization to learn from failure, for instance, and far more other executives say any kind of failure is a significant detriment to career advancement (Exhibit 6).

Interestingly, however, slightly more top managers than other executives (33 percent compared with 28 percent) say leaders hinder innovation by maintaining a fear of failure in the organization. There are other notable differences in how executives rank the importance of various failures by leadership teams. For 60 percent of top managers, the biggest hindrance these teams present to innovation is their failure to follow communication with action. Only 48 percent of other executives choose that response, just below the number of those who choose failure by leaders to model behavior that encourages innovation.



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When innovation is the number one priority

A small share of companies seem to have figured out how to foster and govern innovation: 35 percent of top managers say they are "very" or "extremely" confident in the innovation decisions they make. (An additional 40 percent say they are "somewhat" confident.) At organizations where executives are confident and top managers say innovation is their single most important priority for driving growth (11 percent of the total), there are some notable organizational and cultural differences.

One key organizational difference is the use of innovation-related metrics in performance reviews. Although only 29 percent of all companies include these metrics in reviews of C-level executives and business unit heads, 47 percent do so at organizations where innovation is the top priority and 50 percent at organizations where executives are confident in their innovation decisions. Both kinds of organizations are also likelier to make innovation an integral part of the organization's annual planning process—the practice at 40 percent of companies where innovation is the top priority and 45 percent of companies where the executives are confident. Also, at companies where innovation is the number one priority, top managers say they define the themes for the crucial breakthrough innovations as frequently as they determine where to focus innovation among existing products and processes.

Although these executives also say talent is the biggest challenge to successful innovation, less than 5 percent of respondents at companies where innovation is a priority say the right people are available but not allocated to such projects; nearly three-quarters of those who have the right employees say that those people are allocated, motivated, and protected by senior leaders. Notably, less than a quarter of executives who are confident in their innovation decisions say their companies lack the right people to innovate, perhaps indicating that this confidence is based at least partly on the perceived competence of the organization.



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Making innovation work

Respondents agree on some steps that will help them improve the innovation performance of their companies, many of which are aligned with the steps already being taken by confident companies.

Those steps start with leaders. Respondents say ensuring that innovation is a core part of the leadership agenda is central to improving innovation (Exhibit 7). Other systemic changes recommended by many executives directly address organizational issues they identify, such as the failure of top managers to model behavior that encourages innovation and the neglect of innovation risk (just over a quarter of companies today focus on this risk). Some tactics often perceived as important to successful innovation, such as creating a compelling story to help communicate it, are seen as less effective.

Innovation remains a difficult challenge. While many of these suggested improvements are consistent with the approach taken by companies where innovation is the top priority—and with much management advice—most companies clearly find them difficult to implement. The reasons likely lie in what members of the leadership team identify as their top challenges: finding the time to focus on new topics, closely followed by taking risks on new initiatives and changing processes. Meeting those challenges will no doubt help companies with far more than innovation.