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In the realm of corporate strategy, McKinsey's research highlights a key insight – companies that meticulously prioritize aspiration, activation, and execution gain a distinct competitive advantage. This strategic focus not only enables them to outshine competitors but also propels them towards achieving accelerated growth. Delving into the intricacies of this triad – aspiration, activation, and execution – McKinsey's findings unravel a roadmap for companies seeking a competitive edge in today's dynamic business environment. By understanding and adopting these principles, organizations can position themselves strategically to not only navigate challenges effectively but also to thrive and grow at a pace that outpaces industry benchmarks.
In this current era of competing priorities and constant disruption and uncertainty, we know that innovation remains a must, not just a nice-to-have, when capital is readily available. We also know that consciously choosing growth and supporting that choice with the right mindset, development paths, and capabilities can yield superior stock returns. But what role does innovation play in growth and vice versa? To find out, McKinsey identified and analyzed approximately 650 of the largest public companies that achieved profitable growth compared to their industry between 2016 and 2021 while outperforming in the essential capabilities associated with innovation. Some of these companies outperformed their competitors, others were more innovative than their competitors, but 53 companies managed to do both. The 50-plus "innovative growth companies," as McKinsey calls them, are a diverse group, spanning four continents and ten industries. They include well-known brands with market valuations in the trillions of dollars as well as smaller companies just starting to make a name for themselves, some as young as three years old. For all their diversity, these companies consistently outperform in both growth and innovation—and they share a number of best practices that other companies can learn from. Do innovative growth companies perform better than others? In a word, yes.
Most of McKinsey's innovative growth companies achieved Total Shareholder Return (TSR) above their industry median between 2012 and 2022 (Table No.1). The median excess annual shareholder return among these 50-plus companies was 11 points higher than that of Global 2000 companies. Additionally, two-thirds of the innovative growth companies were in the upper quintile of the economic profit curve, representing the distribution of economic profit among Global 2000 companies. Their presence at the high end of the curve is not surprising: McKinsey's research on the power curve emphasizes the importance of making significant innovative moves to outperform the market, including programmatic M&A, dynamic resource reallocation, and differentiating product and process enhancements. In fact, the research suggests that not making any moves is a risky strategy—one that leads to stagnation and underperformance.
What sets innovative growth companies apart?
Siffrorna talar för sig själva, men när McKinsey undersökte hur innovativa tillväxtföretag uppnådde en så hög nivå av prestanda, märkte de att de alla visar en behärskning av de åtta väsentligheterna för innovation. Tidigare forskning från McKinsey visar att dessa är korrelerade med stark ekonomisk prestanda.
Mer specifikt integrerar dessa företag innovation i sina övergripande strategiska strävanden. De aktiverar kritiska tillväxtpassager inom sina kärnverksamheter och söker endast ut i intilliggande marknader där de har den starkaste konkurrensfördelen. De strävar efter excellens i utförandet och investerar i nyckelinnovationsförmågor samtidigt som de använder sig av M&A, särskilt programmatisk M&A, för att utvidga sin innovationsräckvidd.
Strive: Link Innovation to Growth Endeavors
According to McKinsey's research, innovative growth companies consistently place innovation at the forefront of strategic and financial discussions, signaling its significance for organizational growth and health. For instance, our analysis of earnings calls by innovative growth companies reveals that they discuss innovation twice as much as their competitors and emphasize in these conversations that innovation is a means to achieve profitable and sustainable growth. This aligns with McKinsey's previous research on "bold growth companies" and the importance of fostering an innovation mindset among employees.
Innovative growth companies communicate achievable aspirations and clear goals to employees to reduce the fear of failure, criticism, and negative career impact that often hinders innovation. They frequently share progress updates and success stories to inspire and motivate teams and investors. Additionally, innovative growth companies express their commitment to investing more resources in talent and digital capabilities, being nearly three times more likely than their fast-growing but non-innovative counterparts to frame their efforts as a "transformation."
Activate: Explore Multiple Paths to Growth
McKinsey's research indicates that innovative growth companies deliver market-leading revenue growth both within their core businesses and as they expand into adjacent customer segments, industries, or geographies. For example, within their core businesses, innovative growth companies typically generate twice as much surplus growth, even compared to other companies that outperform in growth. And when diversifying into adjacent segments, innovative growth companies achieve at least twice as much revenue growth compared to other companies (Table No.2).
Innovative growth companies achieve this by entering adjacent business areas where they can connect with one or more clear value creation opportunities, such as customer-driven growth, capability-driven growth, growth driven by the value chain, or business model innovation in areas like digitization and sustainability. A recent analysis from McKinsey shows that chemical companies with low-carbon product portfolios or high exposure to end markets supporting sustainability increased their stock returns by more than double compared to companies lagging in sustainability between 2016 and 2021.
In fact, McKinsey's data indicates that innovative growth companies combine two or more of the aforementioned value propositions in over 70 percent of the adjacent areas they enter (compared to less than 25 percent among peers). They seem to prioritize growth in adjacent areas where there is some portfolio similarity and a clear "right to win." And make no mistake, portfolio similarity matters: consider General Mills' acquisition of Pillsbury, a company that shared many of the same capabilities and assets. This move allowed General Mills to reduce its procurement, manufacturing, and distribution costs and increase its operating profit by approximately 70 percent. Additionally, innovative growth companies use advanced analytics and other digital tools to identify hidden growth opportunities, and then they undergo a rigorous process to select the perfect operating model and governance structure for the new business and appoint top leaders with the skills most needed in the new business area.
Innovative growth companies deliver profitable growth relative to their industry while also excelling in the essential capabilities linked to innovation. McKinsey's research reveals to what extent their focus on both aspects helps these organizations create long-term value. It also suggests that other companies can join this small but diverse group of overachievers by placing innovation at the core of all decisions, supporting it with the right mindset, following multiple paths to growth and innovation, and establishing the right capabilities in R&D, digitization, analytics, and corporate acquisitions.
The road may be steep, and change is likely to take time and require dedicated management attention, but companies striving to emulate innovative growth companies can ultimately achieve a profitable balance between today's growth goals and tomorrow's innovation potential.
Source: McKinsey