McKinsey Innovation Report – what stands out
Recently I have outlined the existing gaps at the leadership level on innovation engagement and that innovations continues to lack being integrated into an organizations strategy. Time and time again there are new reports, surveys and different comments made on this serious disconnect still going on that needs clear resolution. Yet it still continues, why?
It is always pleasing to ‘dovetail’ onto the same track as the Big Consultants. When you are already working on and moving beyond the trends they are spotting and highlighting. Being ahead in offering some clear tangible solutions, to help resolve these issues they talk about. One of these was a recent McKinsey Quarterly survey conducted an on-line of just under 3,000 executives on issues surrounding innovation. The report is entitled “Making innovation structures work”- see the link below.
They confirm much that I have seen or gained through my research and point very specifically to the key difficulties organizations are presently having around innovation.
This report feeds directly into the solution work I’m undertaking
The results feed directly into the work I have been undertaking on the leadership gap and the suggested framework of the integrated executive innovation work mat that has been discussed in considerable details in the past few weeks. These have been on this blog site of mine, as well as ovo innovation’s my collaborating partners, and also on innovation excellence’s web site, where we had a whole week of featured articles, discussing the work mat component parts, or as we entitled it, the essential seven domains of innovation that make up this work mat.
So what stands out in the McKinsey report?
The innovation structure is evolving; organizations rely on exploring various organizational models to ‘house’ and execute innovation. They work with multiple structural models to drive innovation efforts and often have separate innovation functions, located in multiple locations. It seems there has been an insurgence of structures in the last three years that are currently being worked through.
Presently there is no uniformed view on innovation organizational design
According to the report, the innovation’s function has shifted in the functions location, in its financing and ownership and increasingly reporting into a C-Level, or even directly into the CEO.
The designs involved include innovation centres, a dedicated new-business development function, emerging business opportunities and technologies groups (often separate) and having advanced technologies institutes as part of the mix.
It still seems where it ‘sits’ partly depends on the time the innovation function was set up. The older structures, set up more than ten years ago 46% of those surveyed report that innovation “sits” at corporate headquarters compared with 65% at the organizations with younger functions. Younger functions also focus more on profit but presently have fewer market successes as they have had less time.
What is the innovation they are working upon?
These are with functional focus on identifying new business opportunities, such as blue-sky innovation and developing potentially disruptive technologies and those report directly into the CEO at around 44% of the functions at present. That maybe the wrong side of the 50% mark I’d like but we seem to be making progress of linking innovation directly to the leadership of our organizations, or are we? Read on.
The factors of success
This is the area of most interest to me. Although it is prefaced by a matter of maturity (whatever that means) there is a ongoing debate on how separate or aligned with corporate strategy an organizations approach to innovation should be. To quote from the report “What is affirmed that strategy (particularly one that is focused, clearly articulated and integrated) is key to successful outcomes. At companies where innovation is fully integrated into strategy, executives are SIX times as likely as those without an integrated strategy to say their separate functions meet their financial objectives effectively, actually very effectively or extremely effectively”
Equally where there is a successful integration there is a sharing of the organizational elements across the portfolio. This includes sharing strategic priorities and focus, knowledge and insights, research insights and analysis, leadership teams and approach to governance with lastly a good talent flow and exchange.
The challenge for innovation is still around strategy though
Only one-third of the executives report innovation is fully integrated in corporate-level strategies, and nearly half say integrating the separate function’s strategic objectives with those of their core businesses is one of their functions most significant challenges.
Those that achieve effective outcomes have clear leadership support
Fifty-six per cent of all the executives surveyed identify C-level and leadership support as a driver of success (second only to strategic focus). There is a more than interesting effective outcome split within the report (exhibit 4) that the level of interact frequency with the C-level team makes a real difference.
Surprisingly but fitting with my own observations and research, is the frequency of interactions between the separate innovation functions and C-level leadership. From this report those deemed as “very frequent” is only at 40%. Can you image the wealth creation, new growth potential that innovation provides yet C-level engagement is only at 40% for very or extremely frequent in discussions? So is innovation that important to the C-level really? Something is wrong here, badly wrong. “Somewhat frequently” comes in at 17% and “rarely or not at all” is 22%. This is the leadership gap we have suggested needs addressing, urgently. Clearly innovation “sounds good, a good sound bite” but is not top of mind for C-level as they would like us to believe, it seems.
Then McKinsey outlines the involvement with separate innovation functions at the C-level as actively involved in the innovation process, from idea generation to commercialization, is only 38%. Those involved in the evaluation and feedback on major innovation decisions, about strategic decisions and priorities of investment makes up another 35%, yet only 26% serve on an innovation council or committee and 14% report that their leadership is not involved with innovation functions at all.
So we are still badly lacking that deep C-level engagement, although the line into them is improving. The need is to get the C-level strategically engaged at least and convince them to provide the innovation framework for others we are proposing, so they do become fully involved and those responsible to work within innovation can conduct their work through the framework we are suggesting to strengthen the C-level engagement and cohesiveness of strategy with innovation activity.
Divergence and philosophical tension in innovation
So the McKinsey report is more than helpful (and timely) on providing a snapshot of practices, successes and challenges but they do suggest there is a divergence and reflection on the struggle and philosophical tensions surrounding innovation. For instance, equal shares of those surveyed, state their function exist to turn a profit, or have no financial targets at all. Equally there are large splits on measuring individual performance with only 30% having the same performance metrics as the rest of the organization, while 32% have innovation-specific metrics and some (23%) seem to straddle the middle of the two. The lack of leaning to one form of measurement or the other needs resolution or is it evenly split due to the nature of the innovation activity the function is working upon?
The one aspect within the report I find really shocks and disappoints me
The concern lies in the number of dedicated employees on innovation, 35% of executives (out of 2,927) have ten or fewer full-time equivalents working within their function and 30% saying at least 51 full-time equivalents dedicated and working on innovation.
That is staggering low in my opinion for the area that is reportedly consistently within the top three priorities of the CEO. No wonder we have the slow innovation cycles, the poor success rates and the lack-lustre performances from innovation if these are the dedicated numbers working on innovation. This is appalling. I just wonder how many efficiency and effectiveness people are employed across some sizeable organizations yet innovation seems grossly undeserved by these results. Putting your future into too few hands, to work on breakthroughs, those new disruptive areas means you must be forced to end up with incremental innovation for maintaining performance, and we all are seeing that clearly emerging time and time again, from most organizations not balancing their innovation activity in a well- structured and thoughtful way.
Risk, poor incentive, under-resourcing innovation and fear still dominate. When will stakeholders start asking more direct innovation questions to the boards of organizations?
The last part of the report deals with the difficulties aligning innovation.
The significant challenges in meeting strategic objectives are hampered by a range of difficulties, the highest as a % of respondents was 53% on the competition coming with short-term priorities from other parts of the business, 42% for difficulties in integrating functions strategic objective with those of the core business, 29% in difficulties in defining the functions business case or value proposition to company leaders, with 19% seeing the challenge of being separated from the rest of the company.
The conclusions drawn from the report.
The report concludes many of these issues are cross-cutting and perennial challenges not just for innovation but for the organizations as a whole.
It reaffirms the absolute need for strategy to precede structure when organizations decide to create new innovation functions and the enabling effect an engaged C-level support brings in driving innovation success. Also it suggests that a real care to tailor the function to existing organization objectives and culture are important.
The report recommends the following:
1) Organizations should not rely on a single innovation function, it must integrate with the entire organization
2) There must be first a well-established and clear strategic focus
3) A clear garnering-in from top management
4) That C-level support is a key factor for innovation success
5) The measures should focus more on the performance and success on the functions role in the innovation value chain, not necessarily financial targets as these can be an unreliable measure or guarantee of success.
This report is timely
After the last few weeks in laying out the business case for having an integrated framework for innovation through our executive innovation work mat, this McKinsey report reinforces that we are on the right track.
I feel even more confident that this framework we offer to bridge the innovation leadership gap can make a solid, maybe significant, contribution to reducing some of the issues and challenges that have been raised within this McKinsey report.
The McKinsey report can be found through this link.
image credit: photographicdictionary.com
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Paul Hobcraft runs Agility Innovation, an advisory business that stimulates sound innovation practice, researches topics that relate to innovation for the future, as well as aligning innovation to organizations core capabilities.
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Paul, i always enjoy your insights. Some contrary thoughts:
1. The report could have been written two decades ago about “human resources” and a decade ago about “customer loyalty.” These functions moved the a ball a bit but never got the whole enchilada. Maybe it’s just the nature of horizontal functions competing for attention and resources from vertical operating silos.
2. Intellectually I understand the push for a holistic and integrated innovation strategy and structure. The only problem is that it’s not realistic. The comprehensive alignment of all the bits and pieces takes time away from real innovation work. Comprehensive structures eventually implode under their own weight – particularly in our world of alternate strategic opportunities.
I’m with you philosophically, however, when i’m on the ground i prefer to identify some reasonable targets (overview strategy; neater structure; governance; barrier removal; idea culture; innovation opportunities); take what i can get; and move on to the next initiative.
I’m a fan of “flavor of the week” even when it is inside something like innovation. Executives tend to chase the “next shiny” thing. You’ve got to keep them interested.
That’s just my opinion, I could be wrong.
Paul, thanks for the article, I enjoyed reading the summary. However, I do disagree with your observation that the low amount of people dedicated to innovation is shocking. Keep in mind that these are usually “overhead” positions, and as such are a “tax” on the business units. Furthermore, the innovation manager is a catalyst, and not the only one in charge of innovation. As you well know Innovation is a matter that concerns EVERYONE at any company. So, in effect the Innovation team is the “glue” that puts or keeps it all together, but not the only one’s innovating in the company.
Just my five cents worth….All the best, Andy
I assume, hopefully correctly that I am significantly older than you or the persons doing the analysis at McKinsey. Innovation is a concept of self. It is not scaleable, discernable nor can it be rationalized and prioritized. Many years ago when Russia was entering peristroika I was involved in strategic advice and counsel to senior levels of the transitional government on tax and peaceful conversion of military resources/assets to civilian use. My western clients always looking for advantage and given USSR/Russia focus on technology and innovation utilizing what appeared to be unending government funding wanted to acquire medical/technical innovation which of course was not yet patented. Many corporations headed to the same entry way at the same time and often one found the wished for innovation tied up. It was only with hard won trust of senior officials did I learn a secret – in the USSR every innovation was funded in at least 3 different cites – not just in Russia but Ukraine and other areas. Therefore if one innovation was taken just find one of the others. As each was completely separate and only known to the most senior officials the ‘go forward’ was somewhat different and patenting globally would pose no problem even as against another western organization. This was a very successful approach to innovation – Government – Military – Scientific – unlimited funding and at least 3 separate, unrelated cites. It worked and well. Today our innovation is still self – Steve Jobs then, and now the South African/Canadian/US innovator who is simultaneously moving the walls on electic vehicles, solar energy and space come to mind. Proving it is still and only self. Sorry my friend no magic bean counting analysis will show the way to the golden fleece, only comes from self. Rare commodity still, the rugged individualist.
Two rules of thumb that generally govern innovation in big corporate:
1) The longer you have worked for the organisation, the less likely the individual is likely to be open to innovation as perceived as too risky
2) The closer you are to head office, the less likely the stakeholder is to be innovative in their thinking as they are too far from the customer, too far from the front line and caught up in politics and bureaucracy
The McKinsey article is an interesting insight the art of big corporate window dressing. A quick read of The Economist’s leader on innovation will reveal an interesting analogy between government and big corporate head office where the government is too big and so stifling innovation.