Meeting the innovation imperative: How large defenders can go on the attack

It’s the essence of capitalism-and at the same time among the most difficult challenges any corporate leader faces. As global wealth creation has increased, the odds of survival have decreased. The average tenure for members of the S&P 500 was 61 years in 1958, 25 years in 1980, and 18 years in 2011. At the current rate, 75 percent of these large incumbents will be gone within 13 years.

Our research shows that from 1999 to 2008, Apple was the only global incumbent to propel its market cap skyward by creating entire new markets, repeatedly, from disruptive innovation.
New McKinsey research on disruptive technologies underscores why the gales of creative destruction seem likely to blow harder than ever. Over the next ten years, the evolution and adoption of now established digital technologies-the mobile Internet, cloud computing, the “Internet of Things,” and the increasing automation of knowledge work-will be buttressed by new breakthroughs in fields such as advanced robotics, next-generation genomics, 3-D printing and energy storage. The potential total impact: as much as $33 trillion a year in additional economic value creation by 2025. That’s a lot of opportunity, but it also promises massive shifts in profit pools, big changes in consumer behavior, and a hungry host of new entrepreneurs eager to shake up the status quo.

Despite the disruption ahead, the good news for incumbents is that opportunities to foster innovation at scale are readily available to large companies with substantial data sets, a stockpile of capital and intangible assets, a process for managing a portfolio of businesses, and a presence in several places along the value chain-all advantages that many attackers, and certainly most startups, do not have.

After setting the context, we will briefly outline five broad approaches, based on the best ideas from McKinsey and others, which can help large companies meet this innovation imperative. The aim is not to provide definitive answers (there are none), but rather to spur our collective brainstorming on this critical issue.

The context
As they consider how best to defend “their very lives” and also go on the attack in the decade ahead, established industry leaders need to be clear-eyed about what they should not be attempting. Specifically, they should abandon any hope of striving to be like Apple. Our research shows that from 1999 to 2008, Apple was the only global incumbent to propel its market cap skyward by creating entire new markets, repeatedly, from disruptive innovation. (Many attackers throughout history have done so, of course.)

“The executives running large companies, of course they want to grow, of course they want to innovate, of course they’d rather have revenue grow faster than slower. But mostly they don’t want to lose what they’ve got.”
Instead, what they should focus on is avoiding the classic “innovator’s dilemma,” brilliantly outlined by Clay Christensen in his book of that name. Christensen’s “aha” insight is not that big established companies decline because they fail to spin giant new markets or radically new business models out of whole cloth. Rather, it’s that by concentrating on preserving their existing profit margins they too often ignore-until it’s too late-the incursions of competitors that deploy new low-cost approaches to grab the low end of their industry’s value chain, and then use those gains to seize ever higher ground. AOL founder Steve Case, who successfully led just such an attack on the traditional media world in the 1990s, describes that mindset this way: “The executives running large companies, of course they want to grow, of course they want to innovate, of course they’d rather have revenue grow faster than slower. But mostly they don’t want to lose what they’ve got.”

Of course, not all incumbents resist change, and many successful innovators never actually conceive the next new thing. Case in point: Korea’s Samsung, which today controls the largest share, by volume anyway, of the burgeoning smartphone market that Apple first created. Throughout business history, it’s the brilliant fast followers, perhaps even more often than the first-mover inventors, that end up claiming the spoils of victory. Even so, their success typically requires a deep willingness to rethink processes and rattle the existing foundations of their organization and industry. It was at Frankfurt’s Kempinski Hotel in 1993 that Samsung’s still-active chairman, Lee Kunhee, now 72, in a fiery three-day speech charged hundreds of his top lieutenants with doing whatever was required to transform what was then a second-tier TV manufacturer into what Samsung is today: the biggest, most powerful electronics manufacturer on earth. “Be prepared to change everything, except your wives and children,” Lee declared. General Electric is a different but no less powerful case of large-scale, long-lived nimbleness-an elephant that still knows how to dance, in Lou Gerstner’s famous phrase.

GE, an original member of the Dow Jones Industrial and of the S&P 500, remains one of the world’s most innovative companies. Its product innovations are legion. One of the latest and most promising is ubiquitous sensors in its turbines and jet engines that help managers monitor wear on parts and better predict maintenance needs. GE’s innovation culture is deep and rich, and extends to business models and processes as well as products. Two brand-new examples come to mind.

Recently, GE conducted a complete review of engineering productivity. The company knew well that software and project complexity was exploding, and that quality issues and resource creep were on the rise; yet it felt that the way it managed engineers hadn’t changed in decades. Accordingly, it researched the true drivers of project outcomes and identified the 500 or so engineers across the company who materially drove productivity. As a result, several of its engineering departments are now 25 percent more productive.

GE also noticed an interesting fact about its health-care business. Each year it spends about $1.3 billion on health care for its employees. Its health-care business earns about $800 million, led by the sale of imaging products and services. The company designed an effort to connect the dots-to learn from the business about ways to save on its health-care expenses, and to learn from its health outlays how to expand revenues in its business.

In the end, each company needs to create and adapt its own innovation playbook. In a recent white paper, The Eight Essentials of Innovation Performance, McKinsey surveyed more than 2,500 executives from more than 300 companies to assess the range of best practices that top-quartile companies that succeed on this dimension master. What follows draws from that work but supplements it with other McKinsey insights and external examples.

There are five steps to rekindle innovation:

1) Quantify your aspirations with clear targets

2) Reallocate assets actively

3) Make it safer to take more chances

4) Rethink talent management and extend your network

5) Above all, evolve new business models