The State of Innovation

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Corporate Strategy and Customer Understanding

Yet the researchers recognize this, and so, for the second year in a row, they compiled a list of "high-leverage innovators"—the companies that "consistently achieve better financial performance than their industry peers while spending less on R&D." This group includes well-known innovators such as Apple (AAPL) and Google, as well as less recognizable names such as Hon Hai Precision Industry and AU Optronics. The most interesting, and valuable, parts of the survey are based on follow-up interviews with executives at these companies about the reasons for their success. This material reveals the importance of aligning innovation initiatives with corporate strategy and of in-depth customer understanding.

Notably, the Booz Allen team went further than in previous years to research how both corporate strategy and customer understanding are connected to innovation strategy. This research showed nearly all of the companies studied could be classified in one of three distinct innovation categories. The report includes mini-case studies of each. "Need Seekers" invent first-to-market products: Black & Decker's (BDK) DeWalt power tools unit, for example, builds databases of customer input gathered by in-house engineers. "Market Readers" respond to what customers buy: Plantronics (PLT) grades product success on how sales live up to forecasts. And "Technology Drivers" focus on internal research. One example: Siemens, which constantly compares its incremental goals with big-picture trends. None of these strategies, the authors state, is more "successful" than the others.

One tactic shared by all of the successful innovators Booz Allen studied was a rigorous process for managing innovation, including "a disciplined, stage-by-stage approval process combined with regular measurement of every critical factor, from time and money spent…to the success of new products in the market."

Lack of Management Strategies

McKinsey's report, published in late October, on "how companies approach innovation" almost picks up where Booz Allen leaves off. Based on an opinion survey of more than 1,000 top executives across industries, 44% of whom worked at companies with $1 billion or more in annual revenues, the report reveals how innovation happens—and doesn't—in companies today. Although 70% of the executives McKinsey surveyed (722 senior vice-presidents and 736 lower-level executives) named innovation as one of their top three priorities for driving growth, the survey reveals the inconsistent and at times counterproductive ways in which companies approach it. For instance, according to the report, "although more than a third of top managers (senior VP level and higher) say innovation is part of the leadership team's agenda, an equal number say their companies govern innovation in an ad hoc way." In other words, there is no process in place to manage—or, presumably, measure—innovation efforts.

Such a lack of innovation management strategies leaves most top managers feeling as if they "don't seem to think they have a lot of control over the innovation process," the survey concludes. This reflects the idea that innovation, at least among those surveyed by McKinsey, is not deployed as a top-down tactic. As the report states, "less than a quarter of respondents indicate that innovation budgets or targets are decided at the top."

In an effort to understand where the problems lie, the McKinsey survey asked questions about talent management (did companies have the right people? Were they allocated well? Were they protected by senior leaders?) and attitudes toward failure (was it encouraged, or punished?). Responses are broken down between those from senior VP level leaders and other executives, so the survey also reveals the clear disconnect between corporate leaders and lower-level executives, at least according to the data gathered by McKinsey. For instance, while 40% of top managers say the problem is they don't have the right employees, only 31% of other executives agreed. And among executives who said they did have the necessary talent, less than a quarter of top managers felt corporate culture inhibited progress, while almost a third of lower-ranked executives thought culture was a problem.