Innovative growers: A view from the top (2024)

In this current era of competing priorities and endless disruption and uncertainty, we know that innovation remains a must-have, not just a nice-to-have, when capital is readily available.1Matt Banholzer, Michael Birshan, Rebecca Doherty, and Laura LaBerge, “Innovation: Your solution for weathering uncertainty,” McKinsey, January 10, 2023. We also know that making a conscious choice to growand supporting that choice with the right mindsets, development pathways, and capabilities can yield superior shareholder returns.2“Choosing to grow: The leader’s blueprint,” McKinsey, July 7, 2022. But what is the role of innovation in growth and vice versa?

To find out, we identified and analyzed about 650 of the largest public companies that achieved profitable growth relative to their industry between 2016 and 2021 while also excelling in the essential capabilities associated with innovation.3Our assessment is based on McKinsey’s proprietary database of about 12,000 companies and their relative mastery of capabilities along four innovation categories: aspire/choose, discover/evolve, accelerate/scale, and extend/mobilize. Using machine learning, natural-language processing, and sentiment analysis of employee reviews, we created a score that served as a reliable proxy for innovation capabilities across these categories. We then reviewed companies that grew faster than their industry while delivering positive economic profit between 2016 and 2021. Some of these companies outgrew their peers, others were more innovative than competitors, but 53 companies managed to do both. The 50-plus “innovative growers,” as we call them, are a diverse group, spread across four continents and ten industries. They include renowned brands with a trillion-dollar market capitalization as well as smaller companies that are just starting to make a name for themselves, some as young as three years old (see sidebar, “Where do innovative growers come from?”).

For all their diversity, these companies consistently excel in both growth and innovation—and they share a number of best practices that other companies can learn from.

Do innovative growers perform better than others?

In a word, yes.

Most of our innovative growers achieved total shareholder returns (TSR) above their industry median between 2012 and 2022 (Exhibit 1). The median excess annual shareholder return among these 50-plus companies was 11 points higher than that for Global 2000 companies. What’s more, two-thirds of the innovative growers were in the top quintile of the economic-profit power curve, which represents the distribution of economic profit among Global 2000 companies.4Chris Bradley, Martin Hirt, and Sven Smit, “Strategy to beat the odds,” McKinsey Quarterly, February 13, 2018. Their presence on the high end of the curve is not surprising: McKinsey research on the power curve points to the importance of making big innovative moves to beat the market, including , dynamic reallocation of resources, and differentiating product and process improvements. In fact, the research suggests making no moves is a dangerous strategy—one that brings stagnation and underperformance.

1

What sets innovative growers apart?

The numbers speak for themselves, but when we examined how innovative growers were achieving such a high level of performance, we observed that all demonstrate a mastery of the eight essentials of innovation, which our past researchshows are correlated with strong financial performance.

Specifically, they build innovation into their overall strategy aspirations. They activate critical growth pathways within their core businesses and enter only those adjacent markets where they have the strongest competitive advantage. They pursue excellence in execution and invest in key innovation capabilities. And they use M&A, particularly programmatic M&A, to extend their innovation reach.

Aspire: Link innovation to growth aspirations

According to our research, innovative growers unfailingly put innovation at the center of strategic and financial discussions, thereby signaling its importance to the growth and health of the organization. For instance, our review of the innovative growers’ earnings calls reveals that they talk about innovation twice as much as their peers5We analyzed a lexicon of innovation keywords across earnings calls across our sample set and determined the relative frequency of usage and discussion of innovation topics versus the overall management discussion. and, in those conversations, emphasize innovation as a means to create profitable and sustainable growth. This is consistent with our previous research on “courageous growers” and the importance of cultivating an innovation mindset among employees.6“Courageous growth: Six strategies for continuous growth outperformance,” McKinsey, October 23, 2023. Innovative growers communicate to employees achievable aspirations and clear targets to reduce fears of failure, criticism, and negative career impactthat often hold back innovation. Innovative growers share frequent progress updates and success stories to inspire and motivate teams and investors. What’s more, innovative growers frequently voice their commitment to investing more resources in talent and digital capabilities, and they are almost three times more likely than their fast-growing but not innovative peers to frame their efforts as a “transformation.”

High digital aspirations. Digital transformation was the impetus for innovation at one leading retailer among our innovative growers: the company sought to increase its online sales by introducing new features such as faster mobile checkout and an app with augmented reality built into it so customers could visualize how the retailer’s products might look in their homes. The CEO and other C-suite executives reinforced the importance of “transformation through innovation” in town hall meetings with employees, during earnings calls, in public interviews, and in press releases. The leaders’ words and investments sent a clear message to customers, employees, and other stakeholders about the importance of innovation in the retailer’s ability to transform and grow. And the efforts paid off: over time, as the new features were launched, the company’s online sales grew 80 percent, with digital sales accounting for 60 percent of overall revenue.

Activate: Pursue multiple pathways to growth

Our research shows that innovative growers deliver market-leading revenue growth in both their core businesses and when entering adjacent customer segments, industries, or geographies. In their core businesses, for instance, innovative growers tend to generate twice as much excess growth, even relative to other companies that outperform on growth. And when diversifying into adjacent segments, innovative growers achieve at least double the revenue growth compared with other firms (Exhibit 2).

2

They do this by entering adjacent business areaswhere they can connect to one or more clear opportunities to create value, such as customer-driven growth, capability-driven growth, value chain–driven growth, or business model innovation in areas such as digital and sustainability. For instance, a recent McKinsey analysisshows that chemical players with low-carbon product portfolios or high exposure to end markets supporting sustainability grew their shareholder returns at more than double the rate of sustainability laggards between 2016 and 2021.7“The triple play: Growth, profit, and sustainability,” McKinsey, August 9, 2023.

In fact, our data indicate that innovative growers combine two or more of the previously mentioned value propositions in more than 70 percent of the adjacencies they enter (compared with less than 25 percent among peers). They seem to prioritize growth in those adjacencies where there is some similarity among portfolios and an obvious “right to win.” And make no mistake, portfolio similarity matters: consider General Mills’ purchase of Pillsbury, a company that shared many of the same competencies and assets. This move allowed General Mills to reduce its purchasing, manufacturing, and distribution costs and raise its operating profit by about 70 percent.8Chris Bradley, Rebecca Doherty, Nicholas Northcote, and Tido Röder, “The ten rules of growth,” McKinsey, August 12, 2022.

Additionally, innovative growers are using advanced analytics and other digital tools to identify hidden growth opportunities, and then they are going through a rigorous process of selecting the just-right operating model and governance structure for the new business and appointing senior leaders with the competencies most needed in the new business.9Chris Bradley, Rebecca Doherty, Anna Koivuniemi, and Nicholas Northcote, “Igniting your next growth business,” McKinsey, July 23, 2021.

Game, set, and match. A leading technology company with deep expertise in hardware design, artificial intelligence, and cloud computing acquired a gaming company with the goal of using its own capabilities to improve the gaming company’s offerings. The pathway to growth here was relatively clear and unencumbered; although they were in slightly different segments of the technology market, the companies boasted similar product portfolios, and once the technical capabilities were integrated, the joint venture was able to go to market with several special releases of legacy games and one-off “special event” gaming offerings, all of which were well received.

Execute: Invest productively in all innovation capabilities

Our research shows that innovative growers invest productively in a range of critical innovation capabilities—including R&D, resourcing, and operational agility—leading to strong business outcomes. In fact, they delivered more than five points of additional excess gross margin versus other Global 2000 firms, which is a key indicator of product differentiation.10“Strategy to beat the odds,” February 2018.

R&D. Innovative growers tend to deliver more tangible outcomes from their R&D investments than their peers. In our research, they generated, on average, 100-plus more patents than their peers but also delivered more strong patents—or patents with broad applicability and lots of citations to other patents. In fact, over the past two decades, innovative growers were awarded three times as many strong patents compared with industry peers (Exhibit 3). And the presence of strong patents often indicates higher value creation potential.

3

Resourcing and operations. Innovative growers are also more likely than peers to have adopted agile operating models and implemented rigorous and dynamic resource allocation processes. They also tend to invest more in digital and analytics and other new technologies compared with peers: our research shows innovative growers have 30 percent more digital and analytics personnel on staff compared with industry peers. And in McKinsey’s recent digital strategy survey of more than 1,000 companies, there was a clear link between organizations with strong innovation cultures and operating models and their ability to increase value through new technologies, including generative AI.11Matt Banholzer, Ben Fletcher, Laura LaBerge, and Jon McClain, “Companies with innovative cultures have a big edge with generative AI,” McKinsey, August 31, 2023. Even in the current uncertain business climate, almost 90 percent of the survey respondents said they are still looking for new growth. Over the past two years, they have been allocating resources to a range of growth pathways—expanding the core, innovating in adjacent areas, or igniting breakout businesses (Exhibit 4).12“Companies with innovative cultures have a big edge with generative AI,” August 31, 2023.

4

Smart resourcing, smart growth. Combining strong innovation capabilities with appropriate levels of resourcing can result in significant value creation opportunities. Senior management at one medical-technology company wanted to build a new line of surgical robotics offerings and, to that end, increased the amount of resources allocated to the company’s R&D function. Over time, that R&D team generated a flood of new patents, averaging about 750 more patents than its medtech peers and delivering one and a half times the total shareholder return. Similarly, a global technology company invested upward of $3 billion to adapt its existing hardware products to support applications in the fast-growing AI and data-processing spaces, more than tripling its annual capital expenditure between 2017 and 2022. This bold move has resulted in 20 percent annual revenue growth at the company over the past five years.

Extend: Cultivate a strong M&A capability

In our experience, innovative growers also distinguish themselves through their dealmaking—and specifically, in their ability to cultivate a strong M&A capability (alongside strong capabilities in R&D, finance, operations). To be clear, there are many “nondigital” technologies (new molecules, for instance). However, looking at digital M&A provides one illustrative lens. For instance, our research shows that innovative growers complete three times more digital M&A deals13Digital M&A deals are those that target assets or capabilities in the digital, analytics, or technology spaces. compared with peers, demonstrating a desire to acquire promising technical capabilities and intellectual property (IP) and a willingness to embrace new technologies and methods to stay ahead of the competition.14“Are you chasing the right digital assets?,” McKinsey, December 22, 2021. Additionally, innovative growers routinely , and leaders come to a shared understanding of the types of deals they want to target, which allows innovative growers to act with speed and purpose when M&A opportunities come up. What’s more, innovative growers are 50 percent more likely than peers to follow a programmatic approach to M&A,15A programmatic approach to M&A involves creating value by choreographing a series of deals (two or more) around a specific business case or M&A theme rather than pursuing singular “big bang” transactions. which McKinsey has repeatedly reaffirmed is far more likely than other M&A approaches to lead to stronger performance and less risk.16“How one approach to M&A is more likely to create value than all others,” McKinsey Quarterly, October 13, 2021.

Forging an ecosystem through programmatic M&A. One technology company pursued a series of midsize acquisitions to bolster its product offerings and exploit cross-product synergies to create an ecosystem for “home security” products. Over a two-year period, the company acquired a wireless security camera player, a home security company, and a DIY home security system provider. These acquisitions came with associated patents, such as the smart doorbell, and allowed the company to expand its reach and to innovate new products (combining the acquired IP with the company’s own hardware and software products).

Innovative growers are delivering profitable growth relative to their industry while also excelling in the essential capabilities associated with innovation. Our research reveals the degree to which their focus on both is helping these organizations create lasting value. It also suggests that other companies, too, can join this small but diverse set of outperformers by putting innovation at the center of all decision making and supporting it with the right mindsets, pursuing multiple pathways to growth and innovation, and establishing the right capabilities across R&D, digital, analytics, and M&A.

The path may be steep, and the transformation will likely take time and dedicated management attention, but the companies that seek to emulate the innovative growers may eventually achieve a profitable balance between today’s growth objectives and tomorrow’s innovation potential.