Innovation November 16, 2009, 4:54PM EST

Economic Recovery Inspires Innovation and Frustration

As innovation revives, companies struggle to make it boost profitable growth. GE, Tata Motors, Marvel, and Virgin Galactic offer diverse models

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While they continue to slog through the longest economic downturn in decades, companies are no longer making cost-cutting their primary focus. Innovation is now front and center on the corporate agenda, according to a global survey we recently conducted with 65 senior executives from diverse industries. Executives are adding more breakthrough innovations and business model changes to their portfolio to fuel the growth engine for the recovery.

Yet our survey reveals that companies by and large are having trouble making innovation efforts work. Executives are struggling to find the right combination of business strategy, operational model, and execution to deliver profitable growth.

Why the concern with execution? Currently every aspect of business is fair game for reinvention—revenue and margin models, functional areas, and even the organization itself. The risks are also a lot higher than in the past. With so many moving parts and so much riding on the outcome, it's no wonder executives are anxious that they will miss the target when they execute. As one executive told us: "Management feels very comfortable about our ability to manage costs—we have a good track record. We don't have the same track record for organic growth from innovation." In other words, it's harder to innovate than it used to be.

There's no magic formula for successful execution, of course. But there is evidence of growing interest in business model innovation, whereas in the past the focus was mostly on product and technology innovation. Roughly one-quarter of the companies surveyed are developing bundled products and services to provide solutions. General Electric (GE), for example, created Power by the Hour, bundling jet engines, financing, fuel services, and operations and maintenance contracts. Bundling products and services creates stronger customer loyalty and improves both revenues and margins.

serving future needs: Virgin Galactic

An additional quarter of companies is developing B2B offerings, or back-office services, with the goal of improving customers' business performance. These business model innovations typically improve a customer's return on assets by squeezing more out of what they already have. They are potent ways to refresh customer relationships and gain competitive advantage.

A further 25% of companies are investing in anticipation of entirely new customer needs, such as the space flights planned by Virgin Galactic. Creating the next new thing can be risky, but this type of business model innovation provides rapid growth via entirely new products and services.

It's perhaps as noteworthy that two further areas of business model innovation are receiving scant attention. Only a small number of companies are significantly expanding the boundaries of their offerings. Marvel Entertainment (MVL), for one, moved from comics into feature films with Marvel Studios, which produced the blockbuster Spiderman movies. Expanding into an adjacency to leverage a core competency, as Marvel did, is fraught with risk, which is probably why few companies do more than dabble in this area. It's likely, however, that this area will grow as companies learn to manage new business models and feel comfortable outside of traditional confines.

Paradoxically, the area of business model innovation that is receiving the least attention may turn out to have the greatest impact. Only 10% of companies are expanding the scale of their traditional offerings. Consider, for example, Tata Motors (TTM), which developed the $2,500 Nano for the millions of Indians who previously could not afford a car.