BCG: Innovation Systems Need a Reboot
Boston Consulting Group (BCG) have released the 2024 edition of their annual Most Innovative Companies report, and it paints a picture of the corporate innovation space in crisis… but with a hint of optimism.
According to BCG, “companies have never placed a higher priority on innovation - yet they have never been as unready to deliver on their innovation aspirations.” The annual study is based on a survey of over 1,000 companies spread across the globe, making it one of the most comprehensive studies of its kind. In particular, the ability to compare innovation trends year to year dating back almost two decades provides a unique insight into global trends in terms of how companies are investing in innovation, as well as the effectiveness of those efforts.
The 2024 report presents a view of corporate innovation at a turning point: while macroeconomic shifts have unsurprisingly created headwinds, companies are overwhelmingly still invested in innovation as the way to keep pace with the exponential rate of change in their respective industries. For most corporates, the biggest risk that lies ahead is ensuring that these increasing innovation investments are effective in generating actual outputs. To put it another way, the challenge statement for innovation leaders working in Fortune 500 companies has shifted from “why should we innovate?” to “how do we make innovation more effective?”
We’ve summarised three key findings from the report that we feel clarifies the problem statement, as well as the recommended approach to succeed and maximise the effectiveness of innovation investments.
The bad: The innovation gap is large, and growing
We at 5 Ways to Innovate coined the term “the innovation gap” back in 2022 after overlaying two specific data points: while 75% of companies stated that innovation is in their top 3 priorities, only 20% of these companies actually had the capabilities to deliver on this ambition (Source: BCG). This innovation gap is the result of a lack of structured innovation systems, leading to an observable decline in the effectiveness of innovation efforts. Think of it as a leaky funnel: rather than sealing the holes, companies have been responding by pouring increasing investment into the top of the funnel, resulting in wastage.
The 2024 report demonstrates this trend continues to rise; the innovation gap is growing. The number of companies ranking innovation as a top 3 priority has grown from 75% to 83% (and in fact the number of companies ranking innovation as their #1 top priority has grown to 35%). However, the readiness of companies to execute has dropped to just 3%.
As the innovation gap continues to grow, logic would dictate that without a course correction companies’ innovation investments will continue to become less effective over time.
The innovation gap is growing: comparative data shows that while companies are investing more in innovation than ever before, their capability to execute on these ambitions is rapidly dwindling. Source: BCG
The good: Companies are ready to invest in new innovation models
The silver lining from the report is that companies are overwhelmingly remaining committed to innovation as their path to overcome macroeconomic headwinds. When asked “Looking ahead at the next year and beyond, what actions do you plan to take?”, a whopping 70% of companies responded that they intend to update their innovation operating model (Source: BCG).
Over half of companies also stated that they intend to invest in expanding their innovation portfolio and growing innovation capabilities in the next 12 months.
This demonstrates a resilience that is encouraging: large companies are aware of the critical role that innovation will play in driving business performance in the short-term as well as the generally accepted long-term benefits. It also signals a warning to companies who have historically under-invested in innovation, indicating that they will be left further behind in an environment where their competitors continue to accelerate their pace of change.
It’s encouraging to see that companies are focused on refreshing the innovation system itself. This indicates that they have identified the root cause of the leaky funnel and are set to invest in improving the effectiveness of their innovation investments.
The challenge: Linking innovation systems to business strategy
While innovation functions will see increased investment in much needed systems over the next 12 months, the report highlights an interesting challenge ahead. Only 30% of companies indicated that they intend to invest in refreshing their strategy.
According to BCG, this poses the risk of a rise in “zombie” innovation organisations that are “lacking an animating strategy to concentrate effort, going through the motions, pushing whatever projects seem interesting through their funnels to satisfy a need for activity.” The risk with these types of innovation efforts is similar to the trend of “innovation theatre” we’ve seen in the past; companies fall into a false sense of security that they are investing in innovation, but in fact become more susceptible to disruption and tend to miss out on the most attractive emerging value pools.
BCG’s recommendation for companies looking to get back on track? “We’d argue for a reboot that starts by establishing—or strengthening—the link between innovation strategy and business strategy.”
While companies are set to invest in refreshing their innovation systems over the next 12+ months, they will need help to ensure that their innovation approach is linked to their business strategy in order to maximise the effectiveness of their investments. Source: BCG
The solution: Invest in an innovation system that links to your business strategy
When we analysed 100 companies to develop the 5 Ways to Innovate System, we discovered that the most successful innovators on the planet invest in innovation systems that are closely matched to their business strategy. There is no point mandating that the CEO needs to own innovation and that all efforts should be driven internally if the company, people, culture and capability are not suited to this approach. In these cases, we found that many companies would be much better taking a divested innovation approach, utilising the ecosystem to tap into industry leading initiatives and putting a system in place that is able to extract value from these external sources.
Based on these findings, we developed the “invested vs. divested” scale which is a core part of the 5 Ways to Innovate system. The system intrinsically links innovation to business strategy by developing an innovation portfolio that is customised to the unique traits and capabilities of the company itself.
The 5 Ways to Innovate system was designed to build an innovation portfolio along an “invested vs. divested” scale in order to ensure innovation efforts are matched to the company’s business strategy. Source: 5 Ways to Innovate
Larry Keeley, best-selling author of Ten Types of Innovation: The Discipline of Building Breakthroughs weighed in with his opinion on these findings and recommendations. Responded on LinkedIn to a post on this topic by Amer Iqbal, CEO of 5 Ways to Innovate, Keeley stated: “Most companies are realizing that in one of the greatest times of change in human history, it is imperative to change your rate of change. But doing that without a clear North Star… merely substitutes frenetic energy for anemic efforts.”
Is your innovation system due for a reboot?
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