Using Innovation to Grow - Within and Beyond - Your Core

 

Rich Kohler

While it is well known that innovation is critical to all companies’ growth, research shows that the most successful organizations use it to:

Not only expand their lead within their industries,

But also disrupt new ones, even in uncertain times.

In last week's article, Pathway to Sustainable Growth, I stated that the biggest key to future growth, many experts believe, will come from innovation: operational improvements that make products faster, better, or cheaper, or new devices that save consumers time and money.

And that innovation could also come from investing in talent. 

Innovation and Growth are Inherently Linked

Companies that build new businesses and develop new offerings, processes, or business models are better able to capture growth opportunities - as well as and hedge against market and technology disruption in a highly uncertain business environment.

In McKinsey's recent survey of over 1,000 global companies, the largest share (39%) of respondents identified the ability to innovate as the most important strategic factor for generating growth over the coming 12 months.

The next 4 include: Relationships with Customers (38%), Relationships with Business Partners (30%), Talent (28%), Operational /Manufacturing Excellence (27%).

The biggest sources of competitive advantage vary by industry, but innovation is consistently in the top three.

In sectors undergoing significant disruption - energy, for example, where supply disruptions and large investments in sustainability require companies to evolve their businesses - innovation is particularly important. 

But even in industries where the evolution of business models is a less urgent need, such as retail, nearly a third of the respondents identified innovation as a top three source of competitive advantage.

What distinguishes top economic performers3 from the broader group, however, is their comprehensive approach to innovation and growth. This applies both within and outside their current industries or geographies.

In McKinsey's survey, top performers cited innovating new offerings as their number one investment priority for accelerating growth over the next 12 months. 

They were also more than

• 63 percent more likely to innovate at scale - by building or acquiring new businesses outside their current industries and

• 50 percent more likely to expand geographically compared with their lower-performing peers.

Innovation Spurs Growth Within - and Beyond - the Core

On average, 80 percent of corporate growth comes from within a company’s core industry, and innovation is critical to that growth. 

While overall industry momentum and commercial levers such as pricing and marketing are critical and cited by 42% of respondents, the next two largest factors, noted by 38 and 34 percent of survey respondents, respectively, are innovation of new offerings within the core business and expanding into new regions.

According to McKinsey, Innovation not only gives companies new revenue streams within their core businesses - but also potentially steepens the entire sector’s growth trajectory. 

For example, Taiwan Semiconductor Manufacturing Company’s:

• Disruption of the integrated semiconductor industry by supplying manufacturing services to other players,

• Combined with its innovations that increase chip computing density,

both raised its revenues by 17 percent annually between 1995 and 2025 and contributed to boosting the sector’s growth. 

Similarly, Apple famously helped redefine the music industry by introducing the iPod and its associated apps and created entirely new platforms with the iPad and Apple Watch, all of which bolstered its ascent to the number-two spot among the world’s most profitable companies.

Top-performing companies put as much effort as other firms do into growing the core. 

What differentiates them from their peers is their use of innovation to venture beyond their industries. 

As technology continues to break down traditional industry barriers, the need to innovate outside the core deepens. 

For example, in McKinsey's research, top performers were:

• 78 percent more likely than their peers to build new businesses in different industries 

• and 68 percent more likely to acquire one in another sector.

This pattern holds true when one narrows the lens to the top 20 global companies by average five-year economic profit. 

Fourteen of them accelerated growth through:

• Significant innovation investments within their core businesses or by

• Creating entirely new markets outside their core

• Sometimes both - underscoring the importance of innovation-led growth.

These moves often occurred over numerous years, even entire economic cycles.

Consider:

• What is your approach to Innovation?

• How are you using it to accelerate your growth?

• And how might it compare with top industry performers?

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