Right now, keeping innovation high on the agenda is often challenging for CEOs in an era of increased uncertainty and pressing cost constraints.
The nagging worry about not pushing hard enough to innovate came to the fore at a recent gathering of leaders at BCG’s CEO Summit in California.
Among the discussions: How can companies lean into the innovation agenda when there are so many urgent demands on a company’s resources and leaders’ time? And how can they address innovation holistically when AI, understandably, dominates the agenda?
The So What
“In tough operating environments when risk and cost management are priorities, the temptation is to extract incremental growth from existing product portfolios and underinvest in innovation that will only materialize in the mid to long term,” says Judith Wallenstein, who leads BCG’s CEO Advisory.
“While volatility actually increases the need for innovation, it often makes organizations more risk averse and paralyzes them.”
The data suggests that the companies which outperform their industry peers are those that keep innovating and making smart, strategic investments during times of economic stress.
Based on an analysis of those companies that have appeared on BCG’s annual Most Innovative Companies list since 2005, there is a strong link between long-term innovation excellence and superior total shareholder return (TSR).
Top innovators outperformed the broader market by 2.4 percentage points annually on average, with particularly strong gains during the 2008 financial downturn and the COVID-19 pandemic.
Separate BCG research found that strategic deals made in down markets generate 9 percentage points greater relative shareholder returns over the following two years than deals made in up markets.
And 43% of transformation programs launched during the pandemic—certainly a moment of crisis—achieved value-accretive growth. That compares with only 28% launched in years of comparative global economic stability.
Such data can also support alignment from the board, persuading those who are reluctant to take on more risk through continuously investing in innovation.
And while AI investments are an essential part of every company’s innovation agenda, they should not necessarily make up all of it, Wallenstein says. CEOs need to align their boards on a holistic set of innovation priorities.
“One of the most impressive traits I see in the innovation leaders I meet is their passion to make better products and services for customers,” she says. “It starts with an obsession that there could be a better product out there, an attitude that simultaneously drives out complacency and fosters innovation.”
Now What
Win the board’s backing. Having a big, bold idea is not necessarily enough in itself. Having the right innovation systems and demonstrating how to execute well is also vital to get alignment. Striving for above-peer research and development excellence is an evergreen in many industries in this context. Many leaders also stress that being clear on which ideas to stop and which ones to prioritize is part of a strong execution culture on innovation. This frees up resources and also demonstrates a clear vision and commitment to the most important ideas.
Harness the power of AI to accelerate the innovation cycle, making it more effective and cost-efficient. This could include identifying market trends by distilling multiple sources of unstructured data at speed, and using simulations to quickly and cheaply test virtual product iterations. AI can also help post launch, with testing performance and providing real-time feedback from multiple sources to aid with post-launch modifications.
Scrutinize competition. This includes being brutally honest about the external environment and asking what a competing product from a traditional or an AI-first competitor could look like. It’s about continuous reflection on what a customer could want and honing in on whether a particular product will meet customer needs in five years’ time.
Build organizational capacity around continuous innovation. This includes deciding where innovation is hosted and who the key decision makers are. Innovation should not be seen as a standalone initiative, but instead become embedded in how the organization operates, makes decisions, develops talent, and allocates resources. Aligning innovation efforts with the company's purpose and values will also help it to become an integral part of company culture. Part of this culture could include visibly rewarding the right level of risk-taking, even when a project does not have the desired outcome.
“Building and maintaining a strong and productive innovation machine is one of the strongest legacies that CEOs can create,” Wallenstein says.
“It is surely worth keeping high on the agenda, even in these uncertain times.”
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