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Managing the Innovation Portfolio to Win

Managing the Innovation Portfolio to Win

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Published by Bugs Tan
Magazine by McKensey
Magazine by McKensey

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Categories:Types, Brochures
Published by: Bugs Tan on Feb 12, 2014
Copyright:Attribution Non-commercial

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03/06/2014

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 According to executives, the best-performing portfolios that help companies out-
innovate competitors are well aligned with strategy, eectively governed, and focused
on breakthrough innovation.
Companies’ innovation aspirations are high,
 but only a minority are outperforming their peers and mastering the portfolio-management activities that are critical to success, according to McKinsey’s latest survey on innovation.
1
 In our previous research on the topic, we
explored the eight key dimensions that underpin successful innovation (and armed
that these eight issues all matter to performance).
2
 Most recently, we focused on the portfolio:
specically, what companies decide to include in their innovation portfolios, how well the
portfolios align with overall company or business-unit strategy, and how those decisions link to overall innovation performance.
 While a few elements of portfolio composition are consistent across dierent levels of
innovation performance, several practices distinguish the best innovators—companies where respondents report high overall performance, as well as high margins and growth rates
relative to competitors. According to executives, these companies focus signicantly more than
others on disruptive and breakthrough innovation activities, and they invest more of their
1
The online survey was in the eld
from July 9 to July 19, 2013, and garnered responses from 1,241 executives representing the full range of regions, industries, company sizes, tenures, and func-tional specialties. To adjust for
dierences in response rates, the
data are weighted by the con-tribution of each respondent’s nation to global GDP.
2
From November 6 to November 16, 2012, we surveyed 2,586 executives on eight categories of innovation practices that drive high performance. The respondents represented the full range of regions, indus-tries, company sizes, tenures, and functional specialties.
Managing the innovation portfolio to win
McKinsey Global Survey results
 J  e  a n- a n ç  oi   s M a  t  i  n
 
2
 Managing the innovation portfolio to win
McKinsey Global Survey results
 budgets in developing new products and technologies rather than maintaining those already in
the portfolio. They also govern their portfolios more eectively, through strong alignment with
strategy and agile resource allocation. Although they are susceptible to the same decision-making biases that plague their lower-performing peers, respondents at high-performing companies are more likely to report having the right expertise and cross-functional
alignment needed to make eective decisions for their portfolios.
 Ambitions to outperform
 According to the results, many companies and business units have lofty goals for their innovation programs. Nearly half of all respondents describe their strategic postures as out-innovating competitors, rather than keeping pace with the overall industry or top competitors, being a fast adopter, or investing minimally in innovation (Exhibit 1).
Exhibit 1
Of those seeking to excel at innovation, a minority of executives say their companies succeed.
 
% of respondents
1
 
1
Respondents who answered “don’t know” are not shown.
2
Our innovation-performance index includes all organizations represented in the survey, not only those where respondents report an out-innovation posture.
Strategic posture companies or business units want to adopt to meet innovation goals,
n = 1,118
Out-innovate others in our industry 
Keep pace with top 2–3 competitorsBe fast adopter or followerKeep pace with industry averageInvest minimum amount to stay relevantNo particular posture1815431st quartile
Successful at out-innovationUnsuccessful at out-innovation
2nd quartile3rd quartile4th quartile244522631410
Distribution of companies seeking to out-innovate, along overall innovation-performance index
2
 
3
 Managing the innovation portfolio to win
McKinsey Global Survey results
Despite the high aspirations, not all companies that seek to outperform are doing so. Just 43 percent of executives at these companies report relative growth rates, relative operating margins, and overall innovation performance that rank in the top quartile of our innovation-performance index for all respondents’ companies, across all strategic approaches. Across
industries, executives at high-tech, manufacturing, and telecommunications rms are the
most likely to say their companies want to out-innovate (Exhibit 2).
The disruptive advantage
To perform well, companies and business units need to pay more attention to their portfolios than to how much they spend on innovation. The results indicate that, on average, companies  with lower rates of organic growth and lower operating margins spend roughly the same share of sales on R&D as their peers with higher growth rates and margins, which is consistent  with our experience and other research.
Exhibit 2
High-tech companies lead the way in their innovation ambitions.
 
% of respondents, by industry
Companies with a strategic posture of out-innovation
Manufacturing,n = 12154 Telecommunications,n = 7249Professional services,n = 14244High tech,n = 9062Pharmaceuticals,n = 8143Consumer products,n = 8941Global energy and materials, n = 15539Financial,n = 10135

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